諾威品牌 (NWL) 2014 Q2 法說會逐字稿

Good morning and welcome to the Newell Rubbermaid Second-Quarter 2014 Earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. A live webcast of this call is available at www.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.

Good morning. This is Nancy O'Donnell. Joining me on the call today are Mike Polk, President and CEO, and Doug Martin, Executive VP and CFO.

During today's call, we will refer to certain non-GAAP financial measures including, but not limited to, core sales and normalized EPS. Please note that Newell has provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release and in the IR portion of our website, as well as on our IR app.

As we normally do, we also have provided risk factors regarding forward-looking statements in our earnings release and in our filings with the SEC. While forward-looking statements are based on our best currently available information, such statements include assumptions of future events that are subject to risk. Actual results may differ materially. We do not undertake to update any of these forward-looking statements.

With that, I would like to turn the call over to Mike Polk.

Thank you, Nancy.

Good morning, everyone. Thanks for joining the call.

This morning we reported a strong set of Q2 results across all key metrics. Core sales grew 4.6%, ahead of our expectations as a result of strong growth in Writing, Tools, and Commercial products. Combined, these businesses delivered core sales growth of 10%. Normalized gross margin increased 80 basis points to 40.3%, driven by increased productivity, positive pricing, and positive mix.

Normalized operating margin increased 90 basis points to 15.8%, despite increased advertising investment of nearly 100 basis points as we more than doubled our Q2 2013 advertising investment behind new brand campaigns and innovation. We delivered normalized net income growth of 12.6% and operating cash flow growth of nearly 52%.

We returned over $160 million to shareholders in Q2, almost double what we did last year, having increased our quarterly dividend to $0.17 per share and bought back 3.9 million shares. And we delivered normalized earnings per share of $0.59, up 18% versus prior year and $0.04 ahead of consensus.

We closed the first half of 2014 with good momentum, particularly on Writing, Commercial Products, and Tools. Writing core sales increased 8.5% in the first half, driven by market share growth in most geographies and better than expected back-to-school selling in anticipation of heavy third-quarter advertising, marketing, and merchandising programs. Commercial Products core sales have increased 5.3% in the first half, as result of strong volume growth in Rubbermaid Commercial Products in all regions, and the return to growth of Rubbermaid Healthcare in North America in Q2. Tools core sales increased 7.8% in the first half, driven by strong volume growth on Irwin across all regions and very good growth of Lenox in North America.

The strong results in Writing, Commercial Products, and Tools have helped us absorb the impact of foreign exchange headwinds, the disruption of the Baby and Parenting recall, the consequences of our strategic choices to exit certain products lines in Europe and reposition the Rubbermaid consumer business for profitable growth. Through the first six months core sales increased 2.8%, despite about 45 basis points of product line exits in Europe.

Normalized operating income margins expanded 40 basis points, despite a nearly 80 basis point increase in advertising. And normalized EPS increased to $0.94, up 10.6% versus prior year.

We are pleased with the momentum building in the business, having just transitioned to our new operating model one year ago. Since that change year ago, we've begun to see growth accelerate. For the 12 months ending Q2 2014, our core growth rate has accelerated 60 basis points versus the prior 12-month period to 3.3%. While this is good progress, we are quite clear there is more opportunity in front of us than behind.

Our Project Renewal savings program is right on track, and we're set to release incremental savings in the second half of 2014. These savings are being reinvested in the business for growth just as our strengthened brand and innovation initiatives are hitting the market. With the focused effort of our new delivery organization, our global supply chain team and our operating segments are together identifying significant new opportunities in procurement, overheads, distribution and manufacturing network optimization, and complexity reduction.

With the focused efforts of our new development organization, we are already seeing the quality of our innovation improve with new products like Sharpie Clearview highlighters, Paper Mate Mix and Match mechanical pencils, Graco 4Ever car seats, and Irwin Impact Performance series accessories. We are producing new, more effective advertising, which has been validated in tests and is now in market, driving increased point-of-sale and market share gains across multiple geographies.

And we've launched new campaigns on Sharpie, Paper Mate InkJoy, Expo, and Irwin. And in the second half we'll launch new campaigns on Graco, Mr. Sketch, and Calphalon, the first advertising in years for these brands. Clearly, we are proud of our second-quarter and first-half performance. With that, let me hand the call over to Doug to go through a more detailed review of Q2 results. And then I'll return to provide some perspective on the balance of year and our agreement to acquire Ignite Holdings and its Contigo and Avex brands.

Thanks Mike.

Good morning, everyone. I'm pleased to provide additional details on the results of a very good second quarter for Newell.

Q2 reported net sales were $1.52 billion, a 3.1% increase versus last year. Core sales, which exclude the impact of net unfavorable FX, increased 4.6%. Strong volume growth in our Writing, Tools, and Commercial Products businesses, along with broad-based positive pricing across the business was partially offset by weaker results in the Baby and Home Solutions segments, and by planned EMEA product line exits.

Reported gross margin was 40%; and normalized gross margin was 40.3%, up 80 basis points over last year. This gross margin performance, our best in the nearly 27 years that I've been with the Company, reflects good productivity, pricing and mix, which more than offset inflation and unfavorable currency.

Normalized SG&A expense was $372.8 million, or 24.5% of sales, down 10 basis points versus the prior year. As planned, we increased advertising spend by 100 basis points in the quarter to support InkJoy TV advertising in the US, Latin America, and Asia, as well as the launch of our 50 Ways to Use Sharpie campaign in anticipation of back-to-school in North America. We will continue to increase advertising investment in the back half behind our Writing brands, as well as campaigns on Graco, Irwin, and Calphalon.

Normalized operating margin was 15.8%, up 90 basis points, reflecting gross margin expansion and operating cost leverage, partially offset by increased strategic investment in our brands and capabilities. Reported operating margin was 14%, compared with 12.6% in the prior year. Interest expense of $15 million was flat year over year, and our normalized tax rate was 27.2%, compared with 26.6% a year ago. We still expect the full-year normalized tax rate to be between 24% and 25%.

Normalized earnings per share, which exclude restructuring and restructuring-related costs and certain other one-time costs, was $0.59, a $0.09 or 18% increase to last year. Second-quarter reported earnings per share were $0.54, compared with $0.37 last year. The improvement in normalized EPS was driven by sales growth; gross margin expansion; a swing to a gain in net operating expense from a loss last year; and lower share count, partially offset by negative currency.

Based on current spot rates, we estimate the negative impact of translational FX to be between $0.03 and $0.04 for the back half of 2014. For the full year, total negative impact of both transactional and translational FX is expected to be between $0.12 and $0.14. Operating cash flow was $96.2 million in Q2, a $32.9 million increase over the prior year. This is driven largely by working capital improvements.

We returned $161.2 million to shareholders during the quarter, including $46.9 million in dividends and $114.3 million to repurchase 3.9 million shares. We stepped up our repurchase activity during the quarter to take advantage of what we believe to be an attractive price. The lower number of shares outstanding versus last year contributed about $0.03 to EPS growth in the quarter. Most of that $0.03 is attributable to last year's accelerated share repurchase plan. And repurchase activity during the quarter contributed about one third of $0.01.

As of the end of Q2, we have $141 million available under our $300 million authorization. And for the full year, we are now modeling an annualized average share count of approximate 279 million shares.

And finally, our balance sheet remains very healthy. We have $143 million of cash on hand and approximately $800 million in liquidity. As previously disclosed, we intend to finance the Ignite acquisition with a combination of available cash and low-cost short-term borrowings. Our debt to equity, EBITDA multiple, and interest coverage ratios continue to be strong, giving us continued financial flexibility for further share repurchases or acquisitions should we choose to pursue these options.

I will now move onto segment results. Starting with Writing, reported net sales grew 5.2% to $502.6 million. Core sales increased 8.9%. Our Latin America Writing business delivered strong, double-digit core sales growth fueled by pricing and the continued success of InkJoy. In North America, core sales grew strong mid-single digits, as we were successful at shipping in a portion of our back-to-school offering earlier in anticipation of our Q3 advertising campaigns and a strong back-to-school season.

The Q2 normalized operating margin in our Writing segment was 26.6%, a 70-basis-point improvement over the prior year, driven by strong productivity, pricing, and cost management, partially offset by increased advertising spend. The Home Solutions segment net sales fell by 2.6% to $388.9 million.

Core sales decreased 1.8% due to a decline in Rubbermaid consumer, where we are deemphasizing some low-margin businesses, and in the core, which is comping prior-year load-ins in sizable window treatments. Partially offsetting this decline was good growth in Calphalon, driven by distribution gains. Home Solutions normalized operating margin was 12.4%, a 110-basis-point decline versus the prior year, reflecting the deleveraging impact of lower sales volume and input cost inflation, partially offset by productivity and reduced overhead expense.

The Tools segment delivered net sales of $222.3 million, a 12.3% increase. Core sales grew 12.9%, led by double-digit growth in Latin America and EMEA, with mid-single digit growth in North America and APAC. If you adjust for the prior-year pull forward of sales into Q1 related to the SAP Brazil implementation, the Tools segment core sales grew 10.1% in the second quarter.

We continue to have good success in Brazil with Irwin, which launched the second wave of its Brazilian Tools expansion in the new product categories this quarter. We are also seeing strength in the Lenox business in North America and EMEA. Operating margin in Tools segment was 13.5%, a 430-basis-point improvement versus last year. This increase was driven by greater operating leverage from the stronger sales growth and gross margin expansion behind pricing, improved mix, as well as reduced launch brand support in Brazil versus last year.

Reported net sales in the Commercial Products segment increased 9.8% to $223.5 million. Core sales increased 9.9%. Rubbermaid Commercial benefited from favorable pricing and good volume growth in North America and Latin America.

The Healthcare business also contributed to the core sales improvement, as we are now comping against a more representative sales base. Commercial Products operating margin was 16.2%, a 540-basis-point increase to last year thanks to leverage from higher sales and improved gross margin.

Our Baby segment reported $183.7 million of net sales, a 6.4% decrease. Core sales fell 6.7% due to weakness at Aprica in Japan, which is facing increased competitive pressure, and also from planned product line exits in EMEA. Partially offsetting the decline was low-single-digit growth in North America, as we are seeing a rebound in the recall-related softness earlier this year.

Graco has a terrific pipeline of new innovation hitting the market in the back half, supported by strong advertising and promotion campaigns. We remain confident that the Baby segment will return to healthier sales trends in the back half. Baby's Q2 normalized operating margin was 6.9%, down 520 basis points to last year, largely due to the deleveraging impact of lower sales; a weaker yen; and inflation, partially offset by pricing.

Looking at Q2 sales by geography, North America grew 3.4% with strong results from Tools, Commercial Products, and Writing, offset by Home Solutions. In EMEA, core sales declined 80 basis points, driven by planned product line exits of $6 million, primarily in Writing and Baby. If adjusted for the impact of these exits, EMEA's underlying growth rate was a positive 2.5%, due primarily to growth in our Tools and Writing businesses. EMEA's operating margin results improved significantly, as we are seeing strong results from the outstanding dedication and effort of our EMEA team delivering on the transformation initiatives.

In Latin America, core sales grew 48.6%, due to strong pricing and volume gains. Adjusted for last year's SAP Brazil pull forward, Latin America would've generated core sales growth of approximately 40%. Finally, Asia core sales showed a decline of 7.9%, largely driven by Aprica.

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

Thanks, Doug.

So now let's turn to our 2014 outlook. This morning, we reaffirmed guidance: core sales growth of 3% to 4%; normalized operating income margin expansion of up to 40 basis points; normalized EPS of $1.94 to $2 per share, which represents growth of 6% to 9%; and operating cash flow in the range of $600 million to $650 million.

Our full-year guidance assumes sustained strong growth in Tools and Commercial Products; excellent sell out and market share growth in Writing, but with a more modest second-half core sales growth as well staged back-to-school retailer inventory positions are sold down; a return to growth on Baby and Parenting behind strong innovation of marketing programs; continued repositioning of the Rubbermaid consumer business within Home Solutions, resulting in flat to slight growth in the second half of year.

There are three factors that can influence where we fall in our 2014 full-year guidance ranges. The first factor is the planned reignition of growth on our Baby business in the second half of 2014. Despite the continued exit of select Baby product lines in Europe, we expect to deliver solid second-half growth in the combined North American and European regions, driven by strong innovation and marketing investment in North America.

Our guidance assumes stabilization of our business in Japan, where we have more work to do in response to a reinvigorated and strengthened competitor. I'll be in Japan next week to see the team and agree a plan of action for the next 12 to 18 months. Our guidance assumes low-single digit global growth in the second half on Baby, with sequentially improving results from Q3 to Q4.

The second factor is foreign exchange. In Q1, we communicated that the full-year transaction and translation ForEx-impact on EPS would be negative $0.10 to $0.12 versus prior year, about $0.05 to $0.06 worse than what was reflected in our original guidance, largely due to the Venezuela devaluation. Transaction ForEx has worsened by another $0.02 since that time. This change is now reflected in our full-year guidance, yielding a negative foreign exchange year-over-year EPS impact of $0.12 to $0.14.

The third factor is the impact of our increased second-half marketing support on Writing point of sales growth and market share. Our 2014 full-year guidance assumes strong sellout during the July to August back-to-school drive period, and typical replenishment ordering in September on Writing. We are well-positioned against this assumption, but will not have clarity until late Q3. While we do not provide quarterly guidance, we do expect about $15 million of Q2 net sales and $0.02 of Q2 EPS, related to the Writing over delivery in anticipation of the Q3 back-to-school drive period, to reverse out in Q3.

All that said, in light of our very strong Q2 and first-half results, and despite $0.07 to $0.08 worse foreign exchange versus our original full-year guidance, and the first half disruption on our Baby business, we now believe we can deliver normalized EPS closer to the high end of our full-year guidance range, in line with our view that the underlying EPS over delivery in Q2 was $0.02 per share.

Let me now turn to our recently-announced agreement to acquire Ignite Holdings. As you know from last week's press release, we hope to complete the deal sometime late in Q3. Although the transaction will have a minimal impact on our 2014 results, largely because of timing, we are extremely excited about what Ignite brings to us.

The acquisition of the Contigo and Avex brands is very attractive because it strengthens one of our core businesses, Home Solutions. It provides immediate access to a fast-growing on-trend segment to the market. It has leading brands that are differentiated via design and product functionality that is patent protected.

It allows us to leverage our broad-reaching business system to bring value to Ignite, since its home markets are our home markets. It is growth accretive, margin accretive, and EPS accretive in year one. And last but not least, it'll provide a large cash tax benefit that subsidizes a meaningful portion of the purchase price.

Let me go a little deeper on the strategic rationale for the deal. Ignite is the leading designer and marketer of on-the-go thermal and hydration beverage containers in North America. The business is growing at an historical compound annual growth rate of greater than 35%. And they expect to have net sales of approximately $125 million in 2014. The durable beverage container category is large, fast growing, and on trend.

This greater than $1 billion US market is growing double-digits because the products in this category support consumers' increasingly active on-the-go lifestyle; give consumers an affordable way to save significant money by avoiding the purchase of disposable water bottles or coffee shop coffee; and provide consumers a more sustainable alternative to the estimated 20 billion disposable water bottles, over 20 billion paper coffee cups, and nearly 25 billion styrofoam coffee cups thrown out every year in the US.

In today's world, these trends are more and more relevant. And with well-designed products that deliver great functionality, the on-the-go thermal and hydration beverage container category has tremendous head room for growth. Importantly, Contigo and Avex are well-positioned to build clear market share leadership because they own unique and differentiated intellectual property that creates a product performance advantage versus the competitive set.

While we cannot build any plans until the deal closes, we can envision a future where we leverage our customer development organization's scale and reach in Ignite's core geographies to accelerate the development of the category and broaden Contigo and Avex distribution. That we invest a portion of Ignite's profitability and leverage our marketing capability to accelerate the development of the Contigo and Avex brands. That we apply Ignite's expertise in IP in this market to strengthen Rubbermaid's participation in the category. And perhaps most importantly, we welcome the incredibly talented people that have built this success story into our organizations to help us replicate it in new markets beyond North America.

That's the future we envision for Ignite and Newell, and we think it will be very bright. We will use our Analyst Day on September 24 in New York to cover our entire development agenda. And we will also take the opportunity to provide more detail on the acquisition of Ignite, which we hope to have completed by that time.

So let me now close with a couple of reflections. We delivered an outstanding Q2 and a solid first half of 2014, despite all the external challenges thrown our way earlier in the year and the ongoing issues with foreign exchange and Venezuela. We have achieved a very competitive set of results, with a higher level of change than most companies even contemplate, let alone drive to action. Our team has once again done an outstanding job of simultaneously driving delivery while driving change.

We are investing behind the core activity systems critical to our business success, establishing a Company that unlocks the full potential of our $6 billion business rather than simply our individual brands or operating units. We are building what we believe will be world-class capabilities in design, marketing and insights, supply chain, and customer development. And we've begun to apply these capabilities to strengthen our brands and accelerate our performance.

We've deployed cash back into the business to unlock the trapped capacity for growth, making Newell leaner and more efficient, investing a portion of those released costs into our brands for accelerated growth and allowing a portion to flow through to operating margin increases. We've strengthened our portfolio by exiting or divesting nearly $350 million of growth, margin, and EPS diluted businesses, and now announcing an agreement to acquire a growth margin and EPS-accretive business.

We've put our cash to work, repurchasing nearly $750 million of our own shares over the last three years, while simultaneously increasing the annualized dividend from $0.20 per share in early 2011 to $0.68 per share today. We are passing value back to shareholders as we create a new future for our Company.

And we've generated a very competitive return for our investors through this period, increasing the market capitalization of the Company from just over $3 billion in late Q3 2011 to over $8.5 billion today.

We are rightly proud of our progress. But more importantly, we are excited by our future, as we are certain that we are just now approaching the starting line. And there's a much bigger value creation story to be delivered from this point forward. We are convinced that we are firmly on track to both strengthen the Company and create that upside. That's the power of the growth game plan.

With that, let me pass the line to Nancy to set up Q&A.

Thanks, Mike.

We are aware of the fact that there are several CPG companies reporting today. And so we're going to make an effort to close out our call in a timely manner. We appreciate your help in this effort; and therefore, we ask you to limit your questions to one per caller with one follow-up if needed.

We're ready for our first question, Operator.

Nik Modi.

Good morning, everyone.

Good morning, Nick.

Just my quick question clearly you guys are looking for pretty strong back-to-school season just given some of the activity this quarter. And it seems like this quarter, the overall consumer environment is really (inaudible)-- just wanted to get your thoughts on back-to-school in general. But also Walmart has been very clear that there are planning to be very aggressive on price during the back-to-school season. So I'm just trying to understand how that's going to affect you. Are you co-funding any promotions, or are you just going to get the benefit of Walmart taking out its own margin to get the traffic?

Thanks, Nick. Two comments. First of all, I think Nancy's message was directed to me to be picky in my answer. (laughter) I will try to be focused.

Our joint customer business plan with Walmart is something we've been working on all year, and we are quite pleased with how it is set up for back-to-school, as we are with our other customers, we take that process really seriously, and it is a very granular and detailed series of conversations that get us to our merchandising plans. We are quite pleased with the structure we've got set up, and we don't see anything unusual in the way we are funding that activity this year relative to other years. So I'll deal with that question in that way.

We have very, very strong advertising and marketing plans in Q3. Starting really in about the middle of July, so maybe last week we start to go on there with heavy weights, right the beginning of September. So that is certainly a change in our investment profile versus last year.

And in fact, from an advertising standpoint, in Q3 we will spend as a Company more on advertising than we spent in all of 2013. We are serious about investing behind our brands.

We are clearly doing that in a differentiated way versus our competitive set and we expect it to yield the outcome that we expect with respect to POS sales growth and share increases. That's key to us delivering our full-year number, and we've put it all out there to try to make that happen, and we saw evidence in Q2 that in fact that's working. That approach is working.

Great, thanks, Mike.

Connie Maneaty, BMO Capital Markets.

Good morning. Can you give us an idea of what you think the key is to strengthening the Home Solutions business?

The key to strengthening the Home Solutions business is grounded in the repositioning of Rubbermaid consumer. And we are in the midst of a pretty significant shift in what we believe our focus should be, strengthening our food and beverage business, strengthening some other components of the business, but pulling back on the less differentiated elements of the product line.

We're going to continue to experience the challenges of that change through this year. It was always contemplated for this year, and it is really important to us for our future to get Rubbermaid into a cadence of profitably growing.

So Connie, it is at the heart -- it is one of our biggest brand challenges. And we've got a whole pipeline of ideas that we will execute over the next 12 to 18 months on that business to include leveraging some of the Ignite IP to enable Rubbermaid to participate in the fast growing beverage container market as I suggested during the earlier comments.

We will get into this in much greater detail at the Analyst Day on the 24th, where Mark, Richard, and Chuck and the brand teams will walk through where they are headed with Rubbermaid.

Great. Thank you.

Olivia Tong, Bank of America/Merrill Lynch.

Good morning.

Hello, Mike. How are you? I wanted to ask you about gross margin SG&A progression through the quarter and just the sustainability of the margin improvement, because clearly you're running ahead of your full-year target so far. And pricing and productivity tend to be pretty sticky, and your advertising dollar up pretty dramatically in Q2, so can you talk about margin progression in the second half? Thanks a bunch.

I will give you my view on gross margin, I'm never really comfortable with where we are in gross margin. I just think there's a lot -- we have a lot of opportunities still in front of us.

So I'm very pleased with the outcome in the first half of year, and with the progress in Q2. And part of the surge to greater than 40%, which has always been one of these historical mile markers that we were holding out there; the surge above 40 on a normalized basis is in part due to mix. So as Baby recovers, we will see some draw down on that as a result of Baby momentum.

So I don't think 40% yet is a sustainable level of gross margin, so as you think about your models don't plan that in. However, it gives us the encouragement that 40% is just a mile marker.

As we continue to tackle the opportunities in the business to release costs as I suggested that the supply chain and the operating segments were identifying, we will have more and more opportunity. So while 40% is not sustainable at this point, it certainly suggests that it will be at some point in our future.

We're incredibly focused on this because gross margin percentage is the lifeblood of any consumer goods business, and so we need to sustain steady progress through the year. As you know we've made it part of a short-term incentive program for our Management team, and that keeps it sharply in focus.

Thanks, Mike.

Chris Ferrara, Wells Fargo.

Hello, Chris.

Hello, Mike. Obviously fundamentals were pretty good. I wanted to go into some I guess less fundamentals within Venezuela for a second. Lat Am was up 40%, how much -- can you take a shot at quantifying, one, how much pricing in Venezuela like inflationary pricing helped you?

And then can you talk a little bit about the fair price rules, and the fact that you're 1% of sales and 3% to 4% of profit. How are you thinking about that going forward? And what kind of an impact might that stuff be?

Yes, we took pricing across Latin America not just in Venezuela to deal with the in part transaction ForEx issues across the whole region. We took pricing as we have been taking pricing in Venezuela to deal with issues there as you know.

Chris, I don't want to get into the specifics of exactly how Venezuela pricing contributed to the overall outcome for Writing, but it wasn't unsubstantial. It was a meaningful part of Latin Writing growth. And it may not be sustainable at that level going forward, so that's another variable that needs to be considered as you think about gross margin progression.

All that said, we are very clear about where we stand relative to the margin cap laws and Doug can provide a little bit more detail about what's going on there in our discussions. But we still believe we will have some pricing capacity going forward.

Chris, we are obviously working within the rules to evaluate where our pricing structure stands by product line and by channel and customer, and there's very likely to be some upward and downward adjustments to our pricing going forward. Not overly concerned about where that may land right now, so fairly confident there.

And I guess I would say we are also seeing a little more fluidness in the currency market, so we've got some additional cash out that we had been waiting for under the old rate. And we've also got some approvals of some cash back for the first time under SICAD I because our school of product segment came up in the essentials market. So we actually put in a little more inventory and there will be a little more inventory on the balance sheet at the end of year so that we've got that in place for next year.

I think the one thing I'd say Chris is in our guidance we've contemplated a more of the same posture, we haven't gotten any indication that we would need to take a different point of view at this point. Unlike as I've read some of their earnings releases up until this point, unlike some of the other things I've read for some other folks, we haven't had that type of conversation. We will move prices up and prices down to make sure we stay in compliance, and we may not have as much pricing leverage going forward, but we don't see any -- at this point, we don't see any material event.

Thank you. That's helpful.

Bill Schmitz, Deutsche Bank.

Good morning. Can we talk about the advertising spending increase? I just want to make sure just for modeling purposes I have the base right. So when you guys talk about a 90% increase, is it a 90% increase off that 2.7% of sales or $154 million from last year? And then I have a follow-up.

No, Bill, you're working off of A&P when you quote 2.7%. So you need to be working off of a component of that. Don't do the math on 90% of the 2.7%. Do it on 90% increase on probably less than 50% of that ratio.

Okay, got you. It seems like even if that's the case that's an incremental $50 million in the P&L. Are you just at a point where the SG&A savings program, the only reductions are reflecting, so you can invest it back? Or are you assuming that the uptick in sales growth is going -- but because obviously you kept your guidance and took us to the high end of the range.

Yes. We are making good progress on overheads and we are really scrutinizing the P portion of A&P to make sure that it is a wise spend. So there's an element of this that's overhead driven, there's an element to this that's gross margin increase driven, and there's an element to this that is driven by shifts within A&P.

So we're going to make sure our money is working hard for us, so we are a year and a half, two years into the new organization. A year into the new operative model. We're still learning as to what works and what doesn't. We are moving money around to make sure that we're getting a growth yield for the investments.

And we will continue to learn. Some of what we are doing this year won't work and we will adjust it next year.

One thing I want to make clear is in Q3 because we've held our guidance on operating income margin progression. In Q3, you will see us invest beyond the capacity of the margin increases we get through gross margin.

So we've held the range of up to 40 basis points on the full year of operating income margin progression, and here we are through the midyear period at 40 basis points. So I would just be aware that we are going to spend to strategically support the outcomes we believe are important in Q3 specifically, which is obviously a very critical drive period.

Great. And then just how do you know if it's working or not and how adaptive is the spending?

It is very adaptive because we're an operating Company now so Doug, me, Mark, Bill, Richard, and WTs in the market sit in a room and decide what's working, what's not. And with the segment presidents adjust where we are going to spend it.

Nothing is static, we're living in a dynamic resource management environment in an operating Company. In a holding company, that would've been impossible to do because all the resources were pushed out. If we want to adjust, we adjust. So if we think we've got -- if Mr. Sketch advertising, which I don't know if you've seen is just extraordinary, if that's going to yield up a pop, we will shift money midstream to that.

That's the beauty of operating the way we are today. So it is a very flexible model in that sense. And we want to be nimble, we are a relatively small Company at $6 billion, we want to leverage that for competitive advantage against -- leverage the power of that $6 billion Company, but the flexible nature of an operating Company to dynamically deploy the resources against the best opportunities. We are doing that.

Great, thank you much.

Lauren Lieberman, Barclays.

Hello, thanks. I was going to ask a little bit about Commercial Product, so outside of Healthcare flattening out and turning positive, it does seem like perhaps you hit an inflection point in the balance of the business with some of the investments you've made in selling and new product development finally kicking in. Is that a fair interpretation of results, so how sustainable is it? Is it matter of contracts kicking in, the selling cycle? I just want some color there.

It is a combination of things, so as you know we invest in selling resources on Tools and on Commercial Products in Latin America in late 2012 into 2013. Those feet on the street are yielding growth. Add that is -- I think we're in the early stages of that impact still.

In North America I'm not sure we've talked about that -- this part of things that explicitly, but we also reoriented our customer development organization, when we took all the top-heavy elements out and focused our selling activities in North America as one Company, released a bunch of money that we invested back into more feet on the street in our distributed sales organization. That clearly is helping us in Commercial Products and on Lenox in North America, where that's where a lot of the selling activity happens. We are getting a growth yield on those investments.

Now importantly, on Tools, we've got a big innovation agenda in Latin America. We initiated one wave of extending the tool belt as we call it in Brazil last year, we executed the second wave. The first wave is now being broadened across Latin America.

The portfolio's being broadened across Latin America. And in Commercial Products we've had a fair amount of innovation. Executive series, which we've exposed to you, is yielding great traction right now as we push Rubbermaid Commercial Products into five star hotels.

So it is a combination of things. It is both selling and innovation. I wouldn't say it is a big advertising investment on these business. It is more waiting on the ground through our sales organization and better innovation.

Great, thank you.

Wendy Nicholson, Bay Research.

Good morning. Echo back to the margin question and obviously there's huge amount of variability across your segments in terms of your operating margin, but if I look even just on an annual basis over the last five years, almost all of your margin expansion, your total margin expansion has come from the Writing segment. So I guess question number one is the Writing profitability nearly 27%, that number specifically, do you think that is sustainable or even expandable?

And when you look at the other segments where you really haven't seen any margin expansion on a sustainable basis over the last few years, do you think there's more restructuring? Is it cost-cutting?

Is it just product mix within the segment and a gross margin issue? I'm trying to get comfortable that come the analyst meeting you're going to be able to say yes, margin expansion is going to be broader and across the segments as opposed to concentrated in that one segment.

It is a good question. We obviously believe it is, but the unlock comes with further work on cost. The nice thing we've seen on both Tools and Commercial Products, we added cost in for selling investment because I was just referring to last year, and we accepted margin step backs for the sake of scaling the business. We are starting to see the return for that investment now with the growth rates and as we hold those fixed cost flat the flow-through to margin. But we have more work to do clearly.

Renewals not done, we're identifying new opportunities. Our overhead structures are still too heavy as a Company even though we've made great progress.

We are quite clear that we have a lot more work to do on cost, and a lot more work to do to make the Company lean and efficient in front of us. And that will release the fuel for growth, and a portion of that will flow through the margin more broadly than it has to date.

I feel good about the progress we made this year on Commercial Products and Tools, and I would expect that to continue going forward. We've stepped back on Baby, where we've also up until this period in time we've made significant progress on Baby margins, more than doubling that business' profitability, and we're dealing with the consequences of the recall and some other issues.

And then in Europe if you look at our European operating income margin, we are well into double digits now on Europe, and very, very pleased having come from no margin in that geography to a very consequential margin structure that also flows through to EPS at a higher rate because of our efficient tax structure in Europe. I think we're making good progress. But Wendy, the challenge is right on, we're not where we want to be or where we have the potential to be, which is why I always say there's still way more in front of us than behind.

Got it. Just with regard to Europe specifically can you remind us what's the product mix within that region, because I know that's an important driver of the margins as well

Writing and Tools obviously very important to us in that region, and we've exited a series of unprofitable Baby businesses and a portion of the fine Writing business that was less profitable. As we pivot our portfolio to what we formerly called wacky, which was brands like Papermate or Reynolds or [barrel] or Sharpie, we end up with a mix benefit that flows through to the P&L. Or Dymo, we end up with a mix benefit that flows to the P&L.

And obviously we are playing our portfolio to win and maximize the contribution of Europe to our overall Company's performance. And Europe right now is playing the role of fueling the growth in both our home markets of North America and the Latin expansion that we are investing behind.

Got it. Thank you so much.

Dara Mohsenian, Morgan Stanley.

Good morning. The core sales growth was obviously strong in the quarter in a difficult environment in general. I'm just wondering how much of a role you think the higher marketing in Q2 had in that top-line result? Or if you think the top-line boost for marketing really is still yet to come in the back half of year, and as you look into 2015 particularly given the Q3 ad spend focus you mentioned.

Then the success you've had in Latin America, and at least the sell-in success on the Writing side, does that increase your confidence on the top-line payback from higher marketing?

I think it is good question. We have yet to see the full value for the investment we started to make in really middle of Q2 from May onward. We see it in our share numbers. We see it in the sell-out numbers, and it's certainly sort of the lubricant that enabled the strong sell-in to back to school.

Importantly we see very good growth on Tools and Commercial Products, which again I think is selling and innovation driven rather than investment driven. Q3 will be the real test of whether we get a return on this, and if we do, we should see a relatively good sell-in in September after the events. And we should see a more broader impact as we start to invest on brands like Graco in Q3 and brands like Calphalon in Q4.

So we have not seen -- we've not yet seen the sustainable growth acceleration of 4% plus type of growth rates. That's still in front of us. Q2 was encouraging. Part of Q2 as we said was related to the over-delivery of the sell-in connected to the strong Q3 plans we've got.

But it is encouraging to see some of the results we are delivering in the context of all the portfolio strengthening moves we are making. Remember we are exiting roughly $25 million of business in Europe. We are repositioning Rubbermaid consumer, which is effectively a step back in that business.

We've been pulling back on Calphalon Electrics, because we believe the core of that brand is in cookware and not in electrics. That's yielding some valuable margin improvement for that business, but also we continue to grow on Calphalon despite those pullbacks.

So you've got these down elevators that are in our core numbers because we don't separate them out, that gives us encouragement that the forward-looking growth rates have potential to accelerate. But it is going to take the investment we are putting in, and we will get a read on that in the back half of year as to whether that strengthens our ability to deliver sustained growth at greater than 4%.

Okay, thanks.

John Faucher, JPMorgan.

I wanted to try and look at the flipside of Chris's question, which is with Latin America driving so much of the core sales growth, it does hide the fact that the rest of the world, particularly if you strip out the Q2 Writing benefit, wasn't quite as strong as the overall number would appear. So can you talk to us little bit about how we should see the rest of the world progressing as we go through the year, sort of trying to strip the Q2 Writing benefit out. And what's the glidepath on Asia getting better on the Baby care business and also Europe as well? Thanks

We feel terrific about Europe's contribution, ex-exits we're getting close to flat on our performance there. I think you should expect more of the same in the back of the year on Europe as we continue to exit the less profitable portions of that portfolio.

In Asia, we are not investing a lot of energy in those markets yet. In China and in Southeast Asia there's terrific opportunity there, but we are really playing for, as we've said strategically we're going to focus on Latin America first and then go east to Asia. That's more of late 2015, 2016 timeframe as we think about those geographies.

We want to try to hold our own there, although we are prepared to accept some declines in those markets rather than dilute the investment profile in North America and in Latin America. We have a long road to go still, much more upside in Latin America, and we will continue to play for that.

Our growth algorithm if you recall pivoted on two things: building our share position in our home markets, and extending our geographic footprint, first to Latin America and then to Asia. That's the algorithm we are executing. As we move forward into 2015 as we get closer to providing guidance we'll in China shine a bit of brighter light on how we think that story will evolve by geography.

To your specific question on Japan Baby. We have work to do there. We are dealing with a different competitor, competitive environment than what we've dealt with for the last two and a half years, a more assertive competitor, not just on price but through innovation. So we have to up our game in Japan.

That's not a quick light switch, that's something that's going to take sequential investment and will take some time for us to turn. So we expect that to be a challenge for a period of time, but it is all hands on deck. And as I said, I'm going over on Monday to sit with the team, Richard will be there, Bill will be with me, Laurel Hurd who's the President of Baby will be there as well, and we will be working with a local team to figure out how to get back the momentum we've lost in Japan.

Okay. Thank you.

Joe Altobello, Oppenheimer.

Thank you. Good morning guys. Since we're talking about Baby I guess I will start there. Looks like 2Q was a little bit softer than we thought. Was just curious what that looked like versus your [internal notifications].

And then Mike you sound a little less sanguine on the back half, obviously more competition in Japan. But has there been any sort of hangover from the recall at Graco? And then one other one if I could sneak it in on Healthcare, it sounds like it returned to growth this quarter, was that an anomaly or do you think that's really a start of a trend? Thanks.

So on Baby, we had slight growth in North America in the second quarter, which is important after a tough first quarter during the recall, there's still a lot of moving parts in the business in Q2 on Baby, and especially in the context of the infant recall in early July. So we've -- it is been a volatile quarter or two for that business in North America.

We have an incredibly strong pipeline of activity coming on Baby in North America for the balance of year, and for the first time in a long, long time we'll be advertising the brand in the back half of year. We believe those activities in concert with the terrific customer relationships we've got will return the North American business to nice growth in the back half of the year.

Europe will continue to exit, so I think that will continue to step back. We are very, very happy with the progress we've made on Baby strategically, and we expect that to get back into a rhythm of constructive performance.

On Healthcare, we're encouraged by Healthcare. I think there was a period of time where hospitals were really holding tight on their capital budgets. We see a little bit of loosening there.

Do I think we've returned to the 30%, 40% type of growth rates that we had in 2012 into 2013? No, but we expect in the back half of year to have nice growth on Healthcare as we continue to develop that business.

We've taken our first step to take our Healthcare platform into a new country in Brazil. Where we've launched an initiative at a hospital network down there to see whether we can in a sustainable way deliver an extended Healthcare platform beyond North America. We will see how that plays out.

Great, thanks, Mike.

Jason Gere, KeyBanc Capital Markets.

Good morning. Main questions have been answered, so I will just ask -- talk to Nancy offline with a few other questions.

Okay.

Budd Bugatch, Raymond James.

Good morning and thank you for taking my questions. Most of my questions have been answered. Just let me ask for a little more color on project renewal and maybe what savings have been done to date and where the focus of renewal now remains for the balance of this project?

Sure, Budd, this is Doug. We are right on track, actually we're ahead of plan on project renewal. We've delivered well over $200 million worth of savings on the program to date for both renewal one and renewal two. And by the end of the year we will be in the range that we said from a savings perspective with another six months to go.

So we feel very good about the progress we're making and we're also thankful we have it, because as you know we've run into some FX challenges over the last couple years, and so that's been very helpful for us and we've also been able to invest back into the business. So right on track.

Just one build on that. So I think there's a lot more cost opportunity in front of us. As you know I've said publicly we will spend 50, 60 basis points per year in restructuring going forward beyond renewal. I want to make sure people don't lose sight of that in their models as they think about how we develop the business.

We're going to have -- as we get into this cost opportunity space, there's just more and more opportunity every day. So I just wanted to make sure I put that marker out there and remind folks of that.

And what kind of cost are you doing in renewal, just right now? Are they product line exits, how are you looking at that?

It is mostly overhead-related change at this point. Some fixed cost in Europe around consolidating our distribution network and our customer service network, but it is mostly overhead-related and infrastructure-related as we build out a stronger global functions in the four areas that we said would be our winning capabilities: design and R&D, marketing and insights, customer development, and the supply-chain.

Terrific, thank you very much.

Bill Chappell, SunTrust.

Good morning. I just want to circle back to Ignite and the acquisition there, and just from a philosophical standpoint why with everything you've done behind the scenes creating a new R&D facility, putting money behind all the new products, why couldn't you have entered these categories on your own? Why pay what was probably a healthy multiple for this type of business? And then what does it say about future acquisitions that you are looking at, and where are there areas where this is a necessary step?

That's a great question. The strategic rationale for -- one of the pieces of strategic rationale for this deal is that it accelerates our ability to participate in what's one of the fastest-growing segments of the housewares category. We were doing our own development work in this space, but these companies, these smaller companies have been out there for 10 years building their capabilities in this area and have established presence.

It would've taken us probably 18 months to 2 years to really scale our activity, so this jumpstarts our participation. That's one piece of the puzzle. The other thing that excited us about Ignite is that they've got a couple of pieces of intellectual property that we think are very valuable in this category and enable the creation of differentiated products relative to the competitive set.

So we've got a fast-growing category, the deal accelerates out participation in it, it gives us access to IP which we can leverage across our business. So those are the things that converged to make this interesting. Now, that alone wouldn't have been enough, of course it's growth accretive, margin accretive, EPS accretive, and by the way, the multiple when you adjust for the cash tax, tax benefit is quite attractive.

So I think this is one that met all of our criteria. To be honest with you I'm not sure we'll find as many to check every box, but this one happened to do it.

Just to follow-up, are there other areas? Is it more on the consumer side where you're looking for these type of things to accelerate, or is it across the whole spectrum of businesses?

Bill what we said is we want to complement our [ajamic] agenda that's captured in the growth game plan with ideas that strategic acquisition to enable us to scale our five core categories. So we are not interested in a sixth business or extending the shoulders of our portfolio. We're interested in winning in the core and strengthening our portfolio in the core.

Now the vast majority of our investments and our activity are going to be focused through the growth game plan on organic growth and development. However, we are going to -- when we see a good opportunity to accelerate our participation that creates a lot of value for shareholders, we're going to go for it and apply some of our capital that way.

The best acquisition obviously we've made in years has been the buyback of our own stock over the last three years, and so that fact is not lost on us. So we will be discriminating in the choices we make, because we don't want -- we continue to believe that we are under valued and we have a line of sight to the opportunity connected to the cost agenda that is quite clear now and compelling.

So we'll find we'll strike the right balance between all of these choices as we think about capital allocation to maximize value. Our interests as a Management team are aligned with our investors' interests in that respect.

Got it. Thanks for the color.

This concludes our question and answer session. I will now turn the call back over to Mr. Polk for closing remarks.

I'd just make a couple -- and I think we've probably lost the vast majority of the folks that were listing, but we're very pleased with Q2, strong set of results. We've delivered a solid set of first-half results that give us the confidence to suggest that despite the headwinds associated with a much worse foreign-exchange environment than we had anticipated coming in the year, and despite the issues created by the external events connected to Baby in the first quarter, we can now suggest that our EPS will deliver towards the high end of the range.

Strategically, we feel like we are making great progress, driving the growth game plan into action, and that's beginning to impact the rate of growth in the business. And importantly, we are putting our capital to work to complement our strong organic agenda as defined by the growth game plan with external development now with the announced acquisition of Ignite. We feel terrific about the team, they've done an incredible job driving delivery while simultaneously driving change, and that gives us the confidence that we are on track to create a brighter future for our Company.

That's all I'd say. I think I'd welcome everybody to come on September 24 to our Analyst Day in New York where we will do a deep dive on our development agenda and the Ignite acquisition, which hopefully will be completed by that point in time. Thanks so much. Have a great day.

Today's call will be available on the web at www.newellrubbermaid.com, and on digital replay at 888-203-1112 domestically, and 719-457-0820 internationally, with an access code of 882-5158 starting at 12:00 PM Eastern Time today. This concludes our conference. You may now disconnect.