Newell Brands Inc. (NWL) Q1 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid's First Quarter 2011 Earnings Conference Call. [Operator Instructions] Just a reminder, today's conference is being recorded. A live webcast is available at newellrubbermaid.com on the Investor Relations home page under Events and Presentations. A slide presentation is also available for download. I would now turn the conference call over to Ms. Nancy O'Donnell, Vice President of Investor Relations. Ms. O'Donnell, you may begin.

Great. Thank you. Welcome everyone to Newell Rubbermaid's first quarter conference call. I'm Nancy O'Donnell. And with me today are Mark Ketchum, our President and CEO; and our Chief Financial Officer, Juan Figuereo. During the call today we will be referring to certain non-GAAP financial measures. Management believes providing insights on these measures enables investors to better understand and analyze our ongoing results of operation. Reconciliation with the comparable GAAP numbers can be found in our earnings release and on the Investor Relations area of our website, as well as in our filings with the SEC. Also, please recognize that this conference call includes forward-looking statements. These statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from management's current expectations and plans. The company undertakes no obligation to update any such statements made today. If you review our most recent 10-K filing and our other SEC filings, you will find a more detailed explanation of the inherent limitations in such forward-looking statements. We thank you for that. And at this point, I'll turn it over to Mark Ketchum.

Thank you, Nancy. Good morning, everyone, and thank you for joining us today. Our Q1 results represent another solid quarter with the highlights being 20% year-over-year EPS growth and strong gross margin expansion. Our top line results a core sales decline of 1.7% was disappointing. But that number is not representative of our business trends and has not given us any reason to change our full year guidance of 4% to 5% sales growth. You will recall from our last earnings call some timing events that affect our Q1 comparisons. Juan will remind you of the details later. After adjusting for these, our Q1 core sales growth would've been plus 1.5%, that's still slightly below our internal expectations but it represents a mixture of very good top line performance across most of our portfolio, especially in our developing regions, netted against a small number of GBUs in which we had a lower start to the year. I'll provide more detail in a moment. As I said before, full year results provide the best gauge of our ongoing progress and we remain confident in our ability to deliver on the financial targets we laid out for you earlier this year. 4% to 5% core sales growth, 50 to 75 basis points of gross margin expansion and 10% to 12% normalized EPS growth for the full year. The specific reasons for our confidence should become clearer during our presentation. We are also announcing today that we plan to increase our dividend by 60%, from $0.05 to $0.08 per quarter. This action reflects our improved capital structure, continued optimism with respect to our growth prospects and healthy ability to generate strong cash flows; all in all, a relatively good start to 2011. Now let's turn to some details. Sales performance across most of the portfolio is positive, with the majority of our 13 business units posting year-over-year core sales growth. However, a couple of our businesses are off to what looks like a slow start, and I want to start this morning by explaining why these businesses have lagged the pack and why we are not alarmed. There will be 2 key takeaways that I would like you to remember. First, we are confident we will return to revenue growth as the year progresses in these slow-start GBUs. Second, the strength of the other business units, combined with this rebound, is the basis for maintaining full year guidance of 4% to 5% sales growth. In fact, this demonstrates the value of our diverse portfolio. The most challenging of our businesses is Baby & Parenting. The trends that we have referenced in the past several quarters, declining North American birthrates and financially strapped consumers trading down to lower price points have turned out to be more persistent and more problematic than previously thought. In response, we're executing the more comprehensive set of plans to counteract the trend going forward. We believe these aggressive plans will deliver a return to core sales growth in the back half of the year. First, we're working with our retail partners to introduce a line of products geared towards more value-conscious consumers. This line of 5 key items will be sub-branded Century by Graco and will be available in stores starting in late Q2 of this year. Second, we continue to respond to real unmet consumer needs, like ease of operation and ease-of-use, age-appropriate customization and side impact safety. We are rolling out the Graco signature series in Q2, which includes the Graco Smart Seat, the newest addition to our successful Grow With Me platform. The Smart Seat is designed to accommodate from newborns all the way up to children weighing 100 pounds. Smart Seat includes a versatile new stay-in-the-car base. The parents only have to install the base one time even as the seating configurations change. The signature series also includes the Graco Love Buggy Stroller [ph], which features a parent-friendly design that allows multiple seating variations to enhance the parent-child connection. Third, we have customer support for a significant increase in promotional activity in the back half of the year, which should positively impact sales. Importantly, the promotional activity is tied into our new product launch calendar. Fourth, we have strengthened product and promotional plans in all of our international regions in support of Teutonia in EMEA, Aprica in Japan and the Graco launch in Brazil. And lastly, we are aggressively going after competitors that we believe are infringing on our patents. This has been especially egregious to some of the private label suppliers who target the trade down on consumer. We have recently filed lawsuits against these competitors and we'll continue to fight vigorously to protect our intellectual property rights, although success through the courts seldom comes quickly. Our Rubbermaid Consumer business also got off to a slow start due to a year-over-year reduction in promotional activities and copied against last year's fourth quarter pre-buys. This business is also going through their own portfolio transformation, learning to grow in new categories and new geographies. We have exited or downsized our presence in the commoditized segments of refuse containers and basic store containers and are now focused on re-handling, cleaning, garage and closet organization, and some specialized storage solutions for our future growth. During the balance of the year, you will see a combination of distribution gains and innovative new product launches that we expect will reverse the Q1 trend and deliver good growth on a full year basis. For example, the Reveal microfiber mop has won 20 points of additional ACV [ph] retail distribution. And our Rubbermaid closet organization systems are also gaining extra placement. The latest addition to our successful Easy Find Lids food storage platform is Easy Find Lids glass, which is currently being sold under retail. The new glass line combines our popular nesting, stacking and no-spill lid system with the reheating and serving advantages of glass. We are supporting this launch with an integrated marketing campaign that includes TV, print and online media. Later in the year, we will introduce a line of unique modularized storage concepts, which have tested very well with consumers. And finally, some of our customers who had less in their promotional support will be returning to more promotional activity coincident with our product innovation. All of these initiatives are expected to contribute meaningfully to Rubbermaid Consumer's top line performance in Q2 and beyond. I'd also like to update you on our Commercial Products GBU, which continues to work through the operating issues we talked about last quarter. Q1 sales indices in Rubbermaid Commercial were depressed by the strong customer pre-buying the first quarter of 2010. In addition, we've been addressing some uneven execution in manufacturing, customer service and innovation launch. We've put a new management team in place in the second half of 2010, including the business unit president and several senior functional heads and are already seeing improving trends and customer service and productivity. Going forward, prioritizing the investments behind our most significant product launches will be the other key to resuming historically strong growth. For instance, the new Rubbermaid commercial clean water system launches in Q2. This revolutionary mopping system features an integrated patented water filter for generating clean water from dirty mopping water. We have won new listings at several key customers, which will positively impact sales going forward. And our Rubbermaid Medical business, which is part of our Commercial Products GBU, continues to generate some very strong double-digit growth. This business will receive preferential investment behind its industry-leading medical carts and workstations designed for healthcare facilities. Net, we are confident these efforts will put us in a position to report better news for each of these GBUs as we progress throughout the year. Now let's turn to the balance of our business, which collectively grew 4.6%. Here are some highlights. Latin America and APAC grew double digits behind the strength in our established Office Products and Tools & Hardware businesses plus the added emphasis we're putting on expansion in developing markets, including Brazil and China. Fourth quarter 2010 launch of Baby & Parenting and Rubbermaid Consumer into Brazil is progressing with current activities focused on expanding availability and building brand awareness. Later this year, we will introduce the Paper Mate and Sharpie product lines into Brazil, building off successful programs elsewhere in the region. China growth is led by Fine Writing, which has seen a strong return from investments and expanded an upgraded retail presence and by Industrial Products & Services, where our investment in additional technical reps is getting us more factory trials and more conversions from Lenox bandsaws. The Decor GBU had a great quarter with double-digit sales growth. Our Levolor brand is capturing additional shelf space in market share, thanks to the continued rollout of Size-In-Store machines. This advanced technology makes it easy for consumers to purchase custom-sized blinds and shades right in the store. And our total custom business also continues to do well behind innovative products like the Accordia energy-saving shades. Beauty & Style contributed very strong growth fueled by the strength of innovative new products like the Goody Simple Styles hair accessories. We are supporting the brand through continued strategic investment. Look for new Simple Styles television ads to air in North America and the U.K. this summer. Our technology GBU saw a strong year-over-year growth driven by DYMO Mimio interactive teaching technologies, DYMO indicia Internet postage and DYMO Industrial labeling. In our Mimio business, we completed a bolt-on acquisition during the quarter, a company called Headsprout. Headsprout is an innovative provider of instructional software targeted at early education, with a particular focus on individualized student learning. While diluted by about $0.03 in the first year, the acquisition of Headsprout is an exciting step forward in building out Mimeo's educational content offering, enhancing and further accelerating the aggressive growth plans we have for this interactive teaching business. We estimate Headsprout will generate over $150 million in cumulative sales over the first 5 years with well above average gross margins. Paper Mate grew nicely behind increased market share in the value-added writing segment, validating the consumer desire for a smoother, more comfortable writing experience. Paper Mate brand has invested in globally common packaging, product lines and supply chain and is now poised to leverage these for growth behind product innovation and geographic expansion. And finally, we had a strong quarter in industrial products and construction tools and accessories. Lenox and IRWIN both generated share-enhancing growth on the strength of international markets, new products and effective marketing and promotions. IRWIN's GrooveLock Pliers continued to show strong momentum supported by advertising to bring its innovative new features to the attention of its target audience. In Q2, Lenox is launching its innovative new hole saw, which features a unique slotted design for easy plug removal. Those of you who came to Atlanta for our Analyst Day last year may remember seeing the demo of this new hole saw, illustrating how clearly superior our product is versus the competition. We are excited about this launch and expect this platform, together with our continued band saw success, to drive strong Lenox growth all year. With that, let me comment on our outlook for the year. Since our last update at the end of January, input costs have continued to rise. While this presents a challenge, we have already taken steps to address it, including pricing actions that have already taken effect or will take effect by mid-July. At the same time, we will continue to look to improve product mix productivity and cost abatement actions to offset excess inflationary pressures as we have done successfully in the past. This is the biggest challenge in front of us. However, I feel comfortable that the new actions we are taking, together with the plans and business momentum already in place, will allow us to deliver our financial commitments. Before I turn the call over to Juan, I'd like to brief you on a couple of other subjects. The first subject is the status of our operations in Japan. The toll on human life and property from the earthquake and tsunami is almost unimaginable. Yet, we were very fortunate. Newell Rubbermaid experienced no loss of life or property. However, we have seen a slowdown in consumption in our 2 largest Japanese categories, Baby Care and Fine Writing, which we estimate will impact the top line by $10 million to $15 million. Perhaps the biggest impact will be on our supply chain, as a couple of our key office product suppliers located in northern Japan are plagued by rolling blackouts, which severely curtailed their output. But we are making do with the existing inventory plus expedited shipments and alternate suppliers that we are bringing online. This story is still unfolding. The second brief is on our European Transformation Plan, which is progressing nicely. We are well on our way to a goal of achieving a sustainable 10% or greater operating margin in Europe. We have opened our new Geneva headquarters, with relocation to that site doing well. And plans for the SAP and EPC conversion next spring are on track. So to sum up, there are a lot of good things going on across our business and across our GBUs. Our innovations are resonating with our target consumers and we are successfully commercializing new and existing products across the globe. The slow start experienced in a couple of our GBUs will be short-lived. First quarter EPS was 20% above prior year and gross margin was solid. We have good momentum as we start Q2, driven by a diverse portfolio. I remain confident in our ability to meet our full 2011 year financial objectives. This confidence is also evident in our decision to increase our quarterly dividend by 60% to $0.08 to take effect when our next regular dividend is declared. For the past 2 years, we have made a significant improvement to our balance sheet and credit metrics, and we continue to generate strong cash flow. With the transformation of our business model portfolio and supply chain essentially complete, we are well positioned to generate the type of sustainable, top line and bottom line growth that can support an increased payout. We understand the importance of dividend income to our shareholders, and we aim to increase our dividend over time to a level that is comparable with our peers on a payout ratio and yield basis. I'll now turn the call over to Juan to walk you through the financials in more detail, and I'll return for some wrap-up comments before taking your questions. Juan?

Thank you, Mark. I'll start with a review of the income statement on a normalized basis. Net sales for the quarter were $1.3 billion, a 0.3% decline versus the prior year. Excluding a positive 1.4% impact from foreign currency translation, our core sales declined 1.7%. As Mark just pointed out, this performance is not indicative of our full year trend as we expect most of our sales growth this year will come in the second half on the basis of a very robust commercial calendar. Also, there are a couple of items impacting Q1 comparisons that need to be taken into account. First, in Q1 2010, there was a customer pre-buying in anticipation of the April SAP go live in our Rubbermaid Consumer and Commercial Products businesses. And in Q4 2010, we had some customer order acceleration to qualify for annual volume rebates. Together, these 2 events accounted for approximately $40 million in timing shift. Adjusting for them, our core sales growth would have been approximately 1.5% in the quarter. In North America, net sales fell 3.4%, a 3.9% core sales decline, mainly due to underperformance in our Baby & Parenting and Rubbermaid Consumer GBUs, as Mark described a little earlier, and to the timing shift I just mentioned. I will provide more details in my segment overview. Our International business grew 9.1% or almost 5% on a constant-currency basis. Leading the way were Latin America and APAC regions, delivering strong core growth of 21.5% and 7.2%, respectively. We generated gross margin of $490.9 million or 37.7% of sales, an increase of 160 basis points compared to the first quarter of 2010 as productivity, favorable mix and the pricing of set input cost inflation experienced during the quarter. Productivity was the strongest contributor followed by higher overhead absorption as we build inventory in advance of international expansion and the new product demand. We expect our gross margin expansion to be lower in the remainder of the year due to higher input cost inflation and the absence of the overhead absorption benefit realized in this quarter. As you may recall, most of the benefit of overhead absorption fell in Q2 last year. It is also important to note that the pricing action Mark alluded to largely take effect mid- to late Q2, while higher input cost inflation is here and now. On a normalized basis, first quarter SG&A expenses were $349.2 million or 26.8% of net sales compared with $326 million or 24.9% of net sales last year. Driving the year-over-year increases were brand-building spend of about $6 million in support of new product launches and new product development, as well as other strategic spending of about $5 million directed towards organic growth in faster-growing segments and new categories, primarily additional direct sales people. Structural SG&A increased approximately $7 million, mainly driven by support for geographic expansion, new market entries and distribution gains in North America. Foreign currency had an unfavorable $4.9 million impact on SG&A for the quarter. Operating income on a normalized basis was $141.7 million or 10.9% of sales compared to 11.2% last year. Interest expense for the quarter was $21.9 million, representing a $10 million decrease versus the previous year. This improvement was driven by the benefit of our capital structure optimization plan and a more favorable interest rate environment. In the first quarter, we completed our capital structure optimization plan, which was initiated in August of 2010. With the completion of the accelerated share repurchase in late March, we accomplished everything we set out to do with this plan. The objectives of the plan were to reduce interest cost, eliminate future dilution from stock appreciation and strengthen the balance sheet with a simpler, more shareholder-friendly capital structure. During the quarter, we exchanged an additional $20 million in principal amount of the extend convertible notes, essentially eliminating these notes from our capital structure. There are currently, less than $500,000 of convertible bonds that remain outstanding and approximately $21 million of the 10.6% notes. We expect to reduce annual interest expense by approximately $20 million to $30 million. We repurchased 27.9 million of the 40 million shares that were issued in convertible debt exchanges in Q3 last year and in subsequent periods. The interest savings more than offset overall dilution, and the net impact is expected to be approximately $0.02 accretive to normalized earnings per share. Our normalized tax rate in the first quarter was 25% compared to 37.7% in the year ago period. The year-over-year tax rate improvement was driven by change in the geographical mix in earnings, as well as the 2010 impact of non-cash tax charges associated with the vesting of equity-based compensation and the expiration of certain domestic tax credits. Our normalized EPS for the quarter came in at $0.30, a 20% increase over last year's first quarter EPS of $0.25. Our first quarter normalized EPS excludes $0.05 per share, reflecting $11.1 million of restructuring and restructuring-related cost associated with the European Transformation Plan and $4.8 million related to a loss on the retirement of convertible notes. A reconciliation of our first quarter normalized EPS can be found in the earnings release. We used $108 million in operating cash during the first quarter versus last year's cash generation of $29 million. Higher inventory level in anticipation of international expansion and new product demand and the timing of customer program and income tax payments were the primary contributors to the year-over-year change in operating cash flow. CapEx for the quarter was approximately $45 million versus $32 million last year. Now I'll turn to our segment information. Home & Family net sales for the quarter were $534.1 million, a 4.1% decline versus last year. Core sales in this segment fell 5.1%. Excluding the SAP pre-buy effect, core sales would have decreased 2.1%. Our Decor, Culinary and Beauty & Style businesses posted strong core growth driven by distribution gain and successful new products. Offsetting this performance was a decline in our Baby & Parenting and Rubbermaid Consumer businesses. As Mark mentioned earlier, we have plans in place to recover the lost ground in these businesses throughout the balance of the year. Home & Family operating income was $56.6 million or 10.6% of sales compared to last year's income of $68.8 million or 12.4% of sales. Pricing and productivity initiatives were offset by lower volume and higher input cost inflation. SG&A increased $6.7 million mainly driven by $2 million in strategic and $3 million in structural spend to support geographic expansion and Decor distribution gains in the U.S. The impact of foreign currency increased SG&A by $1.5 million. In our Office Products segment, first quarter net sales were $364.9 million, a 3.8% increase versus last year. Core sales increased 1.7%. Adjusting for last quarter's volume incentive pre-buy, core sales would have increased almost 4%, with all GBUs contributing to the improvement. This segment is also leading the way for our international growth, posting more than 25% core sales growth in Latin America and high single-digit core sales growth in the APAC region. Office Products operating income was $54.9 million or 15% of sales versus 13.5% last year. Better mix and productivity initiatives significantly expanded gross margin and were partially offset by a $15.9 million increase in SG&A. The increase in SG&A was mainly driven by a $9 million increase in brand-building and strategic spend across the segment, a $5 million increase in structural cost to support new market entries and geographic expansion and the impact of foreign currency, which increased SG&A by approximately $2 million. As Mark mentioned, we completed the acquisition of a small company called Headsprout during the quarter. This bolt-on acquisition will provide proven content capability to our Mimio offering, which will help accelerate classroom penetration in North America. The incremental spend associated with the integration and rapid expansion of this business will be dilutive to earnings by approximately $0.03 in the year. We expect Headsprout will help generate cumulative 5-year sales well in excess of $150 million, at significantly above company average gross margins. In our Tools, Hardware & Commercial Products segment, the first quarter net sales were $403.7 million, a 1.5% improvement over last year and essentially flat on a constant-currency basis. Adjusting for the year ago quarter's SAP pre-buy, core sales would have increased approximately 4.5%. International growth, as expected, was also particularly strong in this segment with high teen core sales growth in both in Latin America and APAC regions. As you may recall, much of our strategic SG&A spend in this segment has been behind the expansion of our Industrial Bandsaw business. This business unit, the Industrial Products & Services GBU, posted almost 20% core sales growth in the quarter. It is good to see continued evidence that our consumer-driven innovation is resonating with customers and consumers worldwide. Tools, Hardware & Commercial Products operating income was $49.4 million or 12.2% of sales, a decrease of 80 basis points and operating margin from a year ago. This was driven by a slight decline in gross margin as input cost inflation was not completely offset by pricing and productivity initiatives in the quarter and by a $3.5 million increase in SG&A. The SG&A increase was mainly due to $2 million of additional strategic spend to support organic growth and new product launches. The impact of foreign currency increased SG&A by $1.3 million. Turning now to our full year 2011 outlook. We remain confident in our ability to deliver on our 2011 guidance. We are making important adjustments to address the higher inflation outlook and a more uncertain economic environment. What has not changed is the fact that our new product innovation are resonating with consumers and we're gaining shelf space and market share in many of our key categories. We're committing to brand-building and the strategic SG&A spending that will drive sales in North America and allow us to continue to accelerate expansion in higher-growth international markets. We continue to expect full year core sales growth of 4% to 5% and expect 1 to 2 points of positive impact from foreign currency. Our current estimate assume the tragedy in Japan will have a negative $10 million to $15 million effect on sales. Although, as Mark mentioned in his remarks, there's still uncertainty as to the full impact on the supply chain. Our guidance for full year gross margin expansion of 50 to 75 basis points remains unchanged. We are experiencing much higher levels of broad-based inflation than we previously anticipated and expect more to come. We have and will be taking targeted pricing actions to offset this excess inflationary pressure. As we look to the rest of the year, I would also like to remind you that similar to our experience in 2010, we expect fluctuation in our 2011 gross margin expansion from quarter-to-quarter and no given quarter will be indicative of the full year trend. This would likely be most evident in Q2 when we compare unusually high gross margin in Q2 2010 that resulted from production timing and its impact on overhead absorption. SG&A expense for the full year is expected to be around 25% of net sales on a normalized basis,. although the acquisition, integration and expansion of Headsprout will put some pressure on that number. Our plan call for SG&A as a percentage of sales to be front-half weighted as we invest behind organic growth opportunities, which is global expansion, including significant new market entries, the explication of distribution gains, new product launches and other strategic brand-building initiatives. We now expect a little over half of the year-over-year increase will be incurred in the first half. Interest expense for 2011 is expected to be around $90 million, reflecting lower debt levels and lower borrowing cost as a result of our 2010 Capital Structure Optimization Plan. Our normalized tax rate for 2011 is projected to be approximately 29%. We are confirming our expectation that normalized earnings per diluted share will increase 10% to 12% in 2011 with most of the increase weighted to the back half. This normalized EPS expectation excludes between $80 million and $85 million or $0.22 and $0.26 per share of restructuring and other plan-related costs associated with the company's European Transformation Plan. We expect annualized net income improvement of $55 million to $65 million upon completion of the European Transformation Plan. This initiative is projected to result in aggregate restructuring and other plan-related cost of $110 million to $115 million to be substantially incurred by the end of 2011. The normalized EPS expectation also exclude $4.8 million or $0.01 per share associated with the loss on the retirement of convertible notes incurred in the first quarter. We continue to expect operating cash flow to exceed $550 million for the full year, including $90 million to $100 million in restructuring and restructuring-related cash payment. We plan to fund capital expenditures of approximately $200 million. In conclusion, we continue to be encouraged by the evidence we are seeing in the marketplace that our strategy is working with customers and with consumers. We're focused on maintaining our growth momentum while continuing to execute against the strategies that will ensure long-term sustainable top line growth and steady progress expanding our gross margin despite significant inflationary pressures. Our first quarter results represent good progress towards those goals and provide confidence that we're creating value for our shareholders. With that, I'll turn it back over to Mark for his final comments. Mark?

Thanks, Juan. Before I open the call to question and answers, I would like to take the opportunity to thank all of the employees at Newell Rubbermaid. Since I started my journey as CEO 5.5 years ago, I've been privileged to be part of this company's dramatic transformation. Change is rarely easy, and I am proud of the progress that we have made. Newell Rubbermaid is well positioned for sustainable growth. We have built a consumer-centric and collaborative culture that supports our goal of being a best-in-class consumer products company. I'm particularly proud of the results of a recent survey of employees that was sponsored by the Atlanta Journal-Constitution, which named Newell Rubbermaid one of the top workplaces in Atlanta. What touched me most was the fact that our employees overwhelmingly said that they believe Newell Rubbermaid has made positive changes and that the new direction of the company is sustainable and inspiring. As I near the end of my tenure as CEO, I'm confident in the strength of this company and as a Director and a shareholder, I'm excited by its prospects for long-term growth and prosperity. I appreciate the support you have given me and my management team over the years. We will continue to work diligently to deliver on our financial commitments and create value for our shareholders. And with that, we' ll now be happy to take your questions.

[Operator Instructions] Our first question comes from Chris Ferrara from Bank of America.

I wanted to get into the, I guess, the 2 businesses that you called out specifically as underperforming right? And the first one, I guess, Baby & Parenting, right? So to your point, I think the problems you're citing are not new ones, I guess. So can you talk a little bit about what you thought was going to go better this quarter that didn't? Because obviously, it missed your expectations, right? And what's different about next quarter? And then I understand that you're going to have Century by Graco. But how much of the negativity can that mitigate? And then can you just talk a little about the long-term prospects of that business, right? Are you -- are you viewing that business as any lesser of a growth engine over the next 3 to 5 years, I'd say?

Let me start there and then go back to your specific questions, Chris. I'm still very optimistic about the prospects for this category on a long-term basis. It's a category where brands matter. It's a category that's been underserved by innovations and underserved in terms of communicating to consumers real differences in products and brands. If I go back to your starting question, you're right. Some of the trends that we've been seeing are trends that we've flagged for actually a number of quarters, but the impact of them have turned out to be more persistent. So what's different, you might say, is number one, on birthrates, they have not rebounded as quickly as some of the forecasters have predicted, and there is no good forecast of birthrates. And then second thing was that this trade-down effect, which is driven by the fact that the new moms and dads, frankly, are usually living on fairly limited incomes, and therefore are always thrifty. Value is always at the top of their list. We've been responding to that value play by products, for instance, like products on our Grow With Me platform that are a terrific value. They still require a slightly higher upfront investment but they have great value because they grow with the child. You can reconfigure the car seat or the feeding chair in several formats to take it from a very -- taking that to accommodate the child from a very young age to an older age. So what we had expected is, one, some abatement in the birthrate phenomenon together with the value of these products that we talked about being able to carry the day and also offset some of the softness in North America with growth in other parts of the world. So what's different going forward is that we're taking a deeper and a more conservative approach to address certainly the trade-down issue. We can't -- there's nothing we can do about the birthrate phenomenon, although I would remark to you that I don't think it's going to get any worse. I think we're at the bottom of what it's going to be, and I think it'll either be stable or going up going forward. But we are really responding to this trade-down phenomenon in 2 ways, well maybe 3 ways. One, is this Century by Graco. Century by Graco is targeted. We're currently 5 key items that are targeted at lower price points. That can compete for that entry-level consumer who just doesn't have the cash outlay. Second, our signature series that I talked about again offers really very meaningful benefits and using the Smart Seat as an example. You may remember we talked about a Grow With Me car seat from over the last couple of years and that safety car seat was reconfigurable to -- go from about 1 year to 5, 6, 7 years. Well, now this new one goes from infant to 100 pounds. So basically, we just even broadened the range out further of the convertibility of these car seats or we're just taking that whole concept and going even one step further with it. But we still know that there is traction in unmet needs in areas like the Grow With Me platform. So we're doing that even better than we did before, we're introducing the Century by Graco. And the other thing we're doing is we've convinced some of the customers who had either walked away from promotions or walked away from promotions with us to come back. And I think those are the three things that'll be different going forward. I think it's likely that we may not return to a year-over-year growth in Q2, but I do expect we will by second half of the year.

Okay, great. And do you think this is a secular issue for the category? Obviously, you're making some changes to your strategy going forward, right? And those sound like not temporary fixes, right? And so is your view that like many other categories, this category may kind of be a casualty of the economic environment environment and people are just done with paying increasingly higher prices for this sort of thing? Or do you still view this more as a temporary kind of cyclical thing?

I think it's temporary but I think it's not going to be a quick return, I think. But I do think it's temporary. I think, again, consumers want the best for their baby. If you look at the way the economies around other parts of the world, the entire family kind of gets together and helps out the newborn parents to fund better products and so on. And again, as we're convinced that there are still unmet or under-met needs in the category that consumers will respond to. And it's our job to bring those innovations forward and then really tell the consumer about those. The other thing I'll tell you too is that I don't want you to forget our other businesses, our expansion of Graco into Brazil. We're bringing, again, new and more relevant products to the market in Europe, including on our Teutonia platform. We're doing the same thing to Aprica in Japan. And so I think there will be this pressure and this pressure won't go away real quickly for lower-priced items and/or more value in the category. And yet at the same time, I still have a lot of parts of the category in the long term. I think it's, again, a category that we can and should win in.

Great. And then just on SG&A, I know you guys had said last quarter that you thought that 2/3 of the year-on-year increase in dollars would fall in the first half. Now you're saying 50%. Can you just talk about what that's a function of? Was SG&A lower this quarter than you thought it's going to be? Is it a function of the sales outlook, even though that doesn't seem to be changed for the full year? Just talk about why that shift changed.

Let me take a stab on that, Mark. Basically, what happened is, with little lower sales in the first quarter than we anticipated, we gated our spend. A lot of the activity that implies geographic expansion, launches into Brazil, stuff like that is also coming in the second half. And some of the spend that we thought was going to occur in the first half is now shifting. But just to be clear, we still expect about 60%, definitely more than half of the spend to fall in the first half of the incremental spend.

Got it.

Our next question comes from Connie Maneaty from BMO Capital.

I was hoping you would discuss how you can maintain your outlook for gross margin expansion if part of your sales are moving towards lower-priced products and promotional activity is going to increase. I mean how can the gross margin outlook stay the same if that dynamic accelerates in the face of rising inflation?

Well, I guess a couple of things. One I think you shouldn't assume that lower-priced items will necessarily come with lower gross margins. And then second, we had promotional activities in our base plan. We just hadn't yet locked them in for the year. This is frankly a return to promotional levels that are similar to what we've had in the past but some of our customers had either walked away from the promotions or, as I said before, walked away from the promotions with us in favor of some lower-cost goods, and now they're returning back especially in support of our innovations. But it's really not as big of a change year-over-year as it might have sounded like. And I think that's a key. The other thing I'd remark is, as I said, I would not underestimate the importance of pricing to maintaining our gross margins. We've indicated that we've already executed a number of price increases, and there's others that we've announced that will go into effect between now and mid-July.

If I could just follow up with that, we've heard from other companies that when promotional activity was high, consumers didn't buy any more of the products. And so they and their retail partners walked away from the promotional activity. Did you see an uptick in your sales last year or in the recent past when you had solid levels of promotional activity?

The answer is yes. And to be clear, a lot of our promotional activity is not the same as the fast-moving consumer goods, which tend to be mostly pricing or pricing together with display. A lot of our promotions are full-priced or not deep discounted displays, end caps and those kinds of things. So a lot of the promotional activity is really just featuring our items at the exclusion of or in preference to some of the other choices in the store. But anyway, when we do run specials -- so we run some pricing promotions on, for instance, our Rubbermaid food storage. We definitely a see a lift from doing that.

Our next question comes from Bill Chappell from SunTrust.

I guess I just want a quick clarification. So your gross margin and EPS guidance -- it does include the new acquisition? I mean does it have a meaningful impact on gross margin this year?

This is Juan. I'll answer that. We don't expect the acquisition to impact gross margins. We do expect it will have an impact on SG&A because we are spending to integrate and expand what we think is a very exciting technology, but no impact on gross margins.

But it is included in the EPS number?

Yes, it is included in our guidance.

Okay. And then second just kind of just turning to the Office Products sector, especially with the comp. I mean it seemed like it's well outpacing what we've seen from the retailers either at the U.S. or internationally. I mean is that market share gains? Or are we actually seeing, starting to see a cyclical left? I'm just trying to understand what's behind that strength?

Again, if you look at our Office Products business, some of it may not be directly comparable to some of the other guys that you're comparing with, right? So our DYMO business doesn't compare with some of the other, what I call, usual suspects nor does our Fine Writing business. And those are included in our total Office Products. That said, you may recall I mentioned in my remarks, we had some nice growth on the basis of share gains in Paper Mate. We're introducing value-added items and smoother writing systems, and we're getting great response to that and expanding that as fast as our capacity allows us to do that. But we also have significant strength, which I referenced in Fine Writing and in our DYMO business, which includes Mimio.

Okay, I did actually one other. On a tax rate -- that 29% for the year, does that include benefits from kind of the European restructuring into one unit or would that be incremental?

It does not include any benefit from the European restructuring. Or I should say it includes little benefit. Most of the benefit from the European restructuring should come starting in mid-next year in 2012 after we have implemented SAP in Europe.

So even for the tax rate?

Yes.

Our next question comes from John Faucher from JPMorgan. John Faucher - JP Morgan Chase & Co: I just want to follow up on that last question. It's recent [audio gap] on inconsequential amount. So can you talk about sort of how you see the runway on this business going forward and what type of additive impact on earnings do you think we can end up seeing over the next couple of years?

Let me take the first crack at that, and then I'll let Juan add to that. I'd actually like to just take a step back and talk a little bit about Headsprout. It really is a, it's a terrific teaching technology. And let me first kind of build the case for it. When we really got into this business with the acquisition of Mimio a number of years ago, which was a whiteboard capture project product, we recognized that the real category potential was in education and, specifically, with interactive education. There are almost 40 million K-12 classrooms around the world and less than 8% of them use interactive teaching. And yet, it's clearly proven to be a more effective way of teaching especially for younger grades. The game that we originally were into with Mimio was a hardware game or, as I said, our whiteboard capture device. But we recognized more and more, as we really try to focus on the educational field, that's a combination of hardware and software and how the 2 work together that is the real advantage and think in the electronic world, like iPad and iPhones, you can understand that concept. So what we wanted to do is really build our capability in the Software side, and that's specifically lesson plans, and so on. And that's what this Headsprout is. In fact, I'd invite you after this call, go on to headsprout.com. It's got a great website that explains what it is. It's got examples of lessons. And in fact, if you have a young one who's learning to read, you can buy this -- a subscription to this yourself and do this at home. It doesn't have to go into the classroom. So while the big volume and the big sales will be in selling it to the XYZ county school system, you can buy it as an individual consumer as well. We like the business because it's subscription-based. And buy a subscription to this software that teaches your child how to read, for instance. It's multi -- oftentimes, these are multi-year subscriptions. It's an ongoing source of revenue. And even more important than this, Headsprout was a small kind of niche company that really specialized on teaching and reading, but they have a unique IP, which is adaptive learning. So in other words, as each child goes through the lesson plans, it pays attention to where they're making their mistakes and it goes back and repeats just that part of the lesson plan. So if they're having trouble with vocabulary or pronunciation or some other element of their reading, it understands that, it doesn't just generically repeat a lesson, it repeats only the parts that they're having trouble with. So it's really terrific IP, and what we believe we can do is use this as a platform to take it from reading to many other subjects, including this adaptive learning. So we think that this works as a package, and as I said the future of interactive teaching technology is a combination of hardware and software, and that gives that to us. I remarked in my remarks that I can easily foresee $150 million in sales over 5 years and superior gross margins, which you would expect from a subscription software service. And the other thing that I'd tell you is that a significant reason why this is dilutive this year is because we're making significant investments in it this year. We're making SG&A investments right away to build our capability to do other subjects to build out the sales force and so on. So I'm really excited and I think if you go online to headsprout.com, you'll get an idea why we're excited. But this is going really help propel that interactive teaching technology business. John Faucher - JP Morgan Chase & Co: Okay, and then the timing in terms of the payback on the deal, any sort of thoughts there? I mean it sounds like it could be a while.

No, it's actually fairly short payback on the acquisition itself. Really what makes us more -- and let me not make a big deal out of this because this is a bolt-on acquisition. It's not a lot of money. Most of the -- or practically all the dilution comes from the investments that we're making, the spending to expand it and to help accelerate Mimio. Our Mimio, the interactive technology, is growing about 30%, granted it's still small, but this will be very significant, as significantly above fleet league average gross margins. So that's really why we're excited. The Headsprout acquisition is cash flow-positive in the short term. And when Mark said $150 million in incremental sales cumulative in 5 years, that is above, significantly above average, gross margin. So that can give you a sense of the kind of NPV, the value that this thing is driving, so we're excited about it.

Our next question comes from Joe Altobello from Oppenheimer. Joseph Altobello - Oppenheimer & Co. Inc.: I just wanted to go back to the Baby & Parenting comments you made earlier in terms of trade-down. I'm just a little curious because you could probably argue that the consumer is better off today than they had been over the last 6 to 12 months. So one, why are we seeing this trade down so acutely now? And two, are you fairly confident that the trade-down you're seeing is related to economics and not a response to competitive innovation?

Yes, well let me respond to both of those. First of all, the consumer, I don't think, especially this consumer, is not better off than they were 6 months ago. They're the ones most affected by the persistent high unemployment rate, right? They're the new people entering the job force, and those are the hardest ones to get employed. People that are employed tend to stay employed, but it's hard to find new jobs. I think the -- and things like high gas prices just add additional pressure to their pocketbook and their expenditure. The second piece, when you talking about innovation -- or out-innovated, frankly, that's why I referenced what I probably normally wouldn't have referenced, which is the legal action we're taking. So yes, some of the competitors, private label producers who are producing some of the products that consumers are trading down to, we think are appropriating inappropriately our technology, and we're going after them. But as you know, that doesn't -- the resolution of that is seldom quick. And so we're not being out-innovated. We're being ripped off. Joseph Altobello - Oppenheimer & Co. Inc.: Okay, fair enough. And then just 2 quick modeling questions. I guess, first, as you look at 2Q and the year-over-year sales change, the only adjustment we need to think about in the base period is the $35 million of pre-buying, which reduced a year ago by about, call it, 2.5 points. And then second, with the accelerated share repurchase done now, what is your expected full year diluted share count?

Say that again. What's expected for the share? I'm sorry I didn't get that last part. Joseph Altobello - Oppenheimer & Co. Inc.: The full year average diluted share count you're expecting in your EPS number?

Oh, the share count. It should be 298 because we bought -- we issued some shares in connection with the convertibles that we've bought in the quarter. But at the same time, we settled the accelerated stock buyback, so those 2 pretty much offset each other. So 298 should be the number. Joseph Altobello - Oppenheimer & Co. Inc.: And the base period adjustment is just the $35 million of pre-buying in the year ago.

Yes. Joseph Altobello - Oppenheimer & Co. Inc.: Okay perfect.

Our next question comes from Lauren Lieberman from Barclays Capital.

Just a follow-up on the share count question. Is the right way to think about 2 of the bigger moving parts in the quarter being the -- or, I'm sorry, for the rest of the year being the $0.03 of dilution from Headsprout is pretty much offset by the lower, the combination of lower interest expense and slightly higher share count?

Yes, that's one way to look at it because we kept our guidance, right? So we're saying our guidance has not changed. We feel comfortable about delivering what we said and absorbing the incremental spend on Headsprout in our number.

Okay, so the Math is ballpark work?

Yes.

My two pieces. Okay, great. And then I just hate to beat the dead horse but on just the acceleration and sales growth implied for the balance of the year, you've certainly explained thought process around Baby and Family, but I was curious how much of what would be an acceleration comes from the rest of the business? Like is the visibility you've got and the momentum you've got on the business that performed quite well in the quarter, is that build from here? So you need stabilization in those softer businesses, but it's not like you need them to become significant contributors for the numbers to tie together.

Well, I wouldn't say that. And in fact, we do expect those other businesses, especially the 2 Rubbermaid, Rubbermaid Consumer and Rubbermaid Commercial, to be significant contributors. A lot of their below-year-ago indices in Q1 was this pre-buy phenomenon, so I just wanted to get that out on the table. But we expect those 2 businesses to be significant growers for the rest of the year. As I mentioned it before, Baby Care will come back more slowly although we still expect that to grow in the second half of the year. And then the other businesses do have strong momentum and momentum which is going to build because they're still exploiting their growth strategies, which I talked about before, including some of the geographic expansion, which we didn't talk about very much but we're pretty excited about the expansion of our writing instruments, our Office Products writing instruments into Brazil. We think that's a big opportunity and we're now building out the infrastructure in terms of the sales and marketing infrastructure in the country, and we'll start shipping by the end of this quarter and really start getting into the activation in the second half of the year. So that's an example of other places where the growth will actually accelerate.

Okay, so that's an example of what I was trying to get at. So like 4% normalized growth in Office Products this quarter, your expectation is that actually does accelerate in the back half. So it's not just about fixing or accelerating what was slow in Q1, it's also that some of the other businesses the outlook is for stronger growth as the year progresses as well?

That's correct.

I would just add to that, that generally, the commercial calendar is busiest in the second half. And as Mark mentioned, we have 2 GBUs in Office Products that are going into Brazil in the second half. That is wide territory for them today.

Our next question comes from Mark Rupe from Longbow Research.

You mentioned on the Rubbermaid Commercial side that the performance is centered by the pre-buy from last year but also some uneven manufacturing customer service innovation. I'm just curious, number one, I guess how significant is that? And then number two, I know the U.S. was lagging some of the international markets in that GBU. Just curious to see if there's any sign of kind of recovery in demand?

Yes, so let me talk about some of the operational issues. So we were experiencing, in the middle of 2010, misses on productivity projects, and those misses on productivity projects were causing the business to pull back on SG&A that, frankly, they should have been spending behind their innovations. That's why the innovation launches weren't going -- weren't yielding what we had expected. And because of the manufacturing issues, we were missing on customer service and the customers were responding and they don't respond well when you do that. And so we were missing some orders and some reorders because of that. So as I said, the key thing we did was we made some numerous changes to the senior leadership and already the parts of those that you would expect to respond most quickly, namely starting to get the manufacturing back under control and the supply chain under control so we can meet orders appropriately at the right inventory levels. We've got the right productivity coming out as that productivity is what fuels your ability to go make your investments in the innovations. We can now concentrate on that. There was one other little thing that we didn't mention before, but it's probably worth mentioning. We were also helped a year ago, throughout the year, by the Hand Sanitizer business. We had a pretty significant bump upwards in hand sanitizer behind the H1N1 scare, if you may remember. That business has almost gone back to where it was previous to the H1N1 scare. So that also has been a little drag on the year but we're about to the point where that's -- we're out of that comp. That was another thing that was kind of slowing that business down throughout the last several quarters. So because that comp goes away, because the Q1 pre-buy comp goes away, because we've got the executional issues fixed and we're not going to miss orders or miss our productivity targets, and because we can now focus on doing a good job on some really terrific innovations and exploiting those innovations, we're feeling good about the future in Rubbermaid Commercial. Recall for a number of years, that was a strong high single-digit, low double-digit growth. And so then it hit a couple -- hit a downturn in the economy and then some other executional issues that slowed it down in 2010, but it should be a strong growth business going forward. And we think you'll start seeing that in Q2.

Okay, would you say, though, that last year with the U.S. lag and maybe the recovery in that GBU relative to the international market, that we'll start to see some of that recovery come back this year?

I think so. I think -- again, I think that trend will help. It's a slow recovery, but I think that trend will help in going forward, absolutely. It's not going further down. I think it only has upward momentum from here.

Perfect.

Our next question comes from Jason Gere from RBC Capital Markets.

I guess the first question just for Juan. I mean, can you put a little bit of context around some of the gross margin? When we think about the second quarter and obviously the commentary that the cost inflation will hit us much sooner than the pricing will benefit, should we be thinking about the gross margin similar to first quarter levels and then accelerating as the rest of the year progresses to kind of get to that 50 to 75 basis points? That's the first question.

I'll start with the last part of the question. No, gross margins will not be as strong as the first quarter because there's the benefit of the overhead absorption in the first quarter. Last year, that was in the second quarter. So we had the benefit in Q1. We will not have the benefit of the overhead absorption in Q2 and the next quarter. We also have -- a lot of the pricing is taking effect mid- to late Q2, and the inflation expectation for us is highest, actually, in the second quarter. So you'll have all of those. I think what is important, though, is that on a full year basis, we're still saying our guidance -- we feel comfortable with our guidance but there will be those kinds of variations quarter-to-quarter.

So just to be clear, so second quarter gross margins are in that 37% range so they could be down almost 200 basis points and the back half should be closer to 39% in that 39% range? Is that a right way of thinking about it?

I think the right way of thinking about it is the guidance that we gave for the full year. And you expect Q2 will not have that benefit so that probably is going to be the worst comp for the year and the other quarters, we'll see how they play out. But just focus on the full year.

Okay. And what's your assumption for oil? I think it was 90 before. Again, for the full year, what are you now assuming?

Well, we don't pick a specific number because, as you know, that's fluctuated a lot. Just looking the last 3 months what's happened behind the civil unrest in the Middle East, right? What we will tell you is not going to back 80, but we're also not predicting it's going to go to 150. Another reason that's important, I wasn't trying to be flippant about that, Jason, obviously, that affects us directly on terms of things like transportation. But even in things like resin, it affects us more indirectly. Recall, half our resin comes from natural gas, which frankly hasn't hardly moved at all in a year and other factors also affect the resin market. It has its own supply and demand dynamic. So I don't want overly fixate on oil.

Okay, and then I guess the other question is just on the pricing. I mean if you could provide maybe a little more color just on where we should see some of that incremental pricing for the back half, maybe the split between domestic, international. And of that 4 to 5 still for the year, what are you assuming price will contribute versus volume and where were you prior when you gave initial guidance back in January?

When we gave the guidance back in January, the inflation outlook was much different. Our inflation outlook now is about twice what it was then. So there is more pricing in the model and our assumption, particularly in the back half of the year. We're thinking probably 150 to 200 basis points of our margin improvement will have to be in pricing because of the much higher inflation outlook.

Just to maybe to lend a little bit of color to it, I'll give you a couple of examples that might kind of help bracket it. These are U.S. because all of our pricing is -- we make our decisions region by region. So we got a global supply system that's affected, but you have to look at the ability of the market to bear it, what your competition's going to do and so on, on a country-by-country basis. But then in the U.S., in our Rubbermaid Consumer business, we're looking at price increases at around 8%. And that sounds like a lot, and yet, it's less than what our current competitors are taking on average. We're looking at pricing probably in the neighborhood of 5%. It won't be across-the-board, but average 5% in Baby Care. So those are the kind of in a relative magnitude of pricing that we're expecting. And it started to talk to -- those 2 haven't gone into effect yet, but we started to have those conversations with our customers.

And what type...

One correction. Sorry, I told you when I said 150 to 200 basis points, that's the inflation outlook, sorry. And we have to offset that. We were looking pricing before to add anywhere from about 50 to 70 basis points, and now we're looking at 60 to 100.

Okay. And then just in terms of when you look at the price elasticity, a lot of companies in HPC [ph] have been talking about taking pricing without any effect on volume. Obviously, a little bit different for you guys because your products are not bought once a month there, but less frequently. So I was just wondering what are the analytics you ran, just the confidence that you have that in those areas where you are taking pricing the volumes will kind of hold up?

Well, because we know that the price pressure exists for all of our competitors, it's either raw material-based or it's import-based and there's inflation in our imported goods. We know that our competitors are facing the exact same pressures. And if any of our customers do direct sourcing, they're seeing that in what they direct-source. And so because of that, these are cost-justified. And as I said, I think they'll be very -- I think, consistently, you'll see these price increases have to go into effect across marketplace. So it could have a small dampening effect in total as the consumer says, "Geez, can I avoid this purchase?" But the fact of the matter is, we're all in the same boat.

Okay, and then the last question is actually housekeeping. Just clarification on the tax rate again. And pardon me on this, for modeling purposes, I think you said the full year will be 29% even with the 25% in the first quarter. So should we be assuming 30%, 31% the rest of the year? Or should we using 29% for our model?

Use 29% for the full year because, really, the way that the tax rate works is you have discrete items from quarter-to-quarter. And because of the accounting rules, we'll have fluctuations up or down. We're still thinking 29%. It could be slightly below that, but generally, 29% should be good.

Our next question comes from Linda Bolton Weiser from Caris. Linda Weiser - Caris & Company: Can you just give us some color on whether share repurchase is possible this year or whether that would be more something to think about for 2012? And also secondly, I thought I heard about some new rating system for car seats that was put into place in the U.S. a while back. And I thought I had heard that your car seats actually did not score well on those safety ratings. Can you correct me on that if I'm wrong? And like explain a little bit what that is about.

Let me start with that one because I don't ever want that rumor out there because it's totally incorrect. No, there aren't new rating systems and, no, we don't score poorly. Just the opposite, we do very well. And in fact, we're introducing products, I mentioned side impact safety. There's not currently a side impact safety standard in the U.S. There is in a few other countries in the world, and we're trying to advance the cause by looking at our U.S. products on that basis so that we can start building a case for side impact safety of car seats that are sold even in countries where that there is no testing or standard for that.

I'll address the part of the question on the share repurchase. I think we're doing well for our shareholders this year in terms of cash distribution. We just announced a 60% dividend increase. In the quarter, we bought back the stock remaining on the convertible note that was $20 million. But the fact is that we have debt maturities still this year that we have to address. So that is the next priority for our excess cash. And by the end of this year, we feel comfortable that we're going to be around the debt leverage target that we want to be. So we'll take another look next year. But for now, I think we've given back quite a bit and we still have debt maturities to service.

Our next question comes from Bill Schmitz from Deutsche Bank.

Just to keep books on this gross margin thing. Do you think that the first quarter's still going to be your seasonally worst gross margin quarter?

Well, not this year, Bill.

Okay, and how about EPS? Do you think it will be down year-over-year in the second quarter?

I think if you work through the math and what we're trying to say on gross margin, that will be probably be a good assumption.

Okay. And then some of the new products...

Just a second. On the gross margin?

This is Nancy. Let me just clarify. The expansion -- year-over-year expansion of gross margin is going to be higher in the first quarter obviously, but the absolute value gross margin is likely to still be lowest.

That was my question. Okay, good. And then in terms of gross margin -- and then gross margin in terms of new product, I think the old policy was you'd never innovate a product unless it was gross-margin-accretive to the base. Is that still the case with the value stuff?

I won't say the policy was ever never, right? But certainly, that is always the target. The target is always new innovations are accretive to gross margins. And that's even the case on the new stuff as well. We don't always hit that, but that's always the expectation as we start a development.

And is there any update on the CEO search?

The update is that there's no news report. Obviously, the search committee is progressing, is making good progress, but there's no details I can share with you. We had anticipated in May, June time it's most likely. And I think if you talk to the search committee, they'd tell you that's still most likely.

Okay, great. And then the dividend payout ratio, like kind of getting to the 40% peer group level. What do you think the timeframe is for that?

We don't have a set timeframe, Bill. We're targeting 30% to 35% payout, and we think that's about the right level for us because we have really a lot of growth opportunities, particularly in international, and you see us investing behind those. So we're going to go slow -- or I shouldn't say slow. We're going to pace it based upon how we see the investment needs for growth.

I'm going to sneak in one last one. The back-to-school season, can you just talk about like where retail inventory levels are for the Pen business and what your guys forecast is for the season broadly?

I think the inventories are kind of normal. I think that the retailers, as they have for the last couple of years, are still managing somewhat conservatively. They won't do what they did 2 or 3 years ago, which is pre-buy a lot and stock it up. And because of that, I think, again, we'll continue to perhaps shift more into the third quarter that 2 or 3 years ago would have shipped in the second quarter.

Got you, but there's not a big...

But we still anticipate it'll be a strong year, a good calendar growthful year. It will be just more paced out throughout the end of Q2 and on into Q3.

Kind of last year, though. There was not a big year-over-year anomaly there?

No. Maybe a little one but not a big one. There could be a little one, though, because again I think we're still seeing our customers wanting to kind of pace it out and bring it in gradually as opposed to load it up and try and push it out or try and return it when they don't sell it.

And our next question comes from Dara Mohsenian from Morgan Stanley.

I was hoping you could give us some color on if you're concerned about consumer demand elasticity going forward as you implement some further price increases. And I'm just trying to get a sense of what you've assumed in terms of a volume impact from higher pricing because if demand was hurt by lower promotional spending and trade-down in a couple of your categories, I guess I'm just trying to gauge the potential demand impact from higher less pricing.

Again, because we anticipate that all of our competitors will be doing the same or perhaps even greater pricing, we think that the impact on demand will be relatively small. And it's hard to quantify per se, but we're not impact -- we're not expecting a big impact based on that. And again, we're taking the compensatory actions in other categories, like the introduction of our Century by Graco, because to the extent that categories like Baby Care are especially sensitive right now. We know we need the alternative to -- so that as all items go up in price, including our competitors, we have a good selection of mid-priced and somewhat lower-priced items for the consumer to choose from.

Okay. And then, Juan, can you review why inventory was up so much year-over-year in the quarter? Was it the top line softness or pre-buying of raw materials or buildup prior the launches? Just give us some detail there. And if that's a concern.

You gave the answer yourself. It was all of those. Obviously, if sales were somewhat below what we expected, that would impact inventory. So there is some of that. But most of it is the building of inventory because we are launching really fairly broad new product launches this year, so building inventory for that. We also have significant geographic expansion. We mentioned that 2 of our GBUs or the Office Product GBUs are launching into Brazil, which will be wide territory for them. So you have the build for that. In addition, as the Japan earthquake and tsunami hit, our businesses built inventory, and that's what they're living off because of the risk to the supply chain.

And we did some pre-buys on some raw materials to take advantage of prices that were lower at the beginning of the year than we expect them to be later in the year. So, a combination of all those things.

Our next question comes from Wendy Nicholson from Citigroup.

My only question was if you could give us some sense of directional guidance for the different regions in terms of the top line growth. Last year, both Latin America and Asia were kind of low double digits for the full year, but there was a big divergence in the first quarter. So given what you're talking about with the Brazil launch and whatnot, should we still think of both Latin America and Asia being low double-digit organic top line growth growers this year, or am I off?

No I think, not that you're wrong, Wendy. I think, yes, we would expect double-digit growth in both Latin America and APAC. We would expect Europe would be a little bit below average and North America closer to average and EMEA a little bit below average because recall the job one for them is keep on working on the transformation plan. The transformation plan prioritizes getting to that 10% sustainable OI [ph] and executing SAP and EPC and then move it to headquarters. And so we're not expecting as robust a growth out of them as we are out of -- sequentially North America will be better and then Latin America and EMEA will be leading the pack.

Perfect. That's all I need.

Okay, I think that's it for today. We appreciate your participation on the call and look forward to talking to you soon.

If we were able to get your questions during this call, please call Newell Rubbermaid Investor Relations at (770) 418-7075. Today's call will be available on the Web at newellrubbermaid.com and on digital replay at (877) 344-7529 with an access code of 450235 starting 2 hours following the conclusion of today's call and ending May 13. This concludes today's conference. You may now disconnect your telephone lines.