Newell Brands Inc. (NWL) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Newell Rubbermaid's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. A live webcast of this call is available at newellrubbermaid.com, on the Investor Relations home page, under Events and Presentations. A slide presentation is also available for download. I will now turn the call over to Nancy O'Donnell, Vice President of Investor Relations. Ms. O'Donnell, you may begin.

Thank you, and good morning. Welcome to the Newell Rubbermaid Second Quarter Earnings Call. With me today is Mike Polk, President and Chief Executive Officer; and Juan Figuereo, Chief Financial Officer. Let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's annual report on Form 10-K and in today's earnings release. Also, our press release and this call contains non-GAAP financial measures that include, but are not limited to, normalized operating income, operating margin and normalized earnings per share. We believe that these measures are important indicators of our operations, and they're provided to facilitate meaningful year-over-year comparisons. A reconciliation of those measures to the most directly comparable GAAP measures is included in the Investor Relations area of our website, as well as in our filings with the SEC. With that, let me turn it over to Mike.

Thank you, Nancy. Good morning, everyone, and thanks for joining our call. This morning, we reported a solid set of Q2 results with good underlying growth trends across most of our portfolio, a 40 basis point increase in normalized operating margin, driven by a 50 basis point gross margin increase, an 11% increase in operating cash flow and $0.47 normalized EPS, $0.02 ahead of consensus and 4.4% ahead of year ago. Through the first 6 months, core sales increased 2.5%, right in the middle of our 2% to 3% full year guidance range. Normalized operating margins expanded 20 basis points, which is at the high end of our full year guidance range of up to 20 basis points. Normalized EPS was $0.80, up 8.1% versus prior year and above the high end of our full year guidance range of 3% to 6%. And operating cash flow increased over $70 million versus prior year and is on track to deliver in our full year guidance range of $550 million to $600 million. So a pretty good set of numbers at the halfway point in the year. Importantly, at the same time that we're driving delivery, we're driving change. During the first half of 2012, we deployed a new simplified group in GBU structure, launched our new customer development organization, executed the European SAP EPC transition, closed a significant Rubbermaid Consumer factory, initiated a new indirect procurement partnership with IBM and gained traction around on our working capital reduction program. I'm proud of the team's effort. We're driving the business towards more consistent performance, and we delivered in a very tough environment. Perhaps as importantly, they believe in our new vision and strategy and are resolved to strengthen our company and accelerate performance as we move into 2013 and beyond. There's still much to do, but we're on track to where I hoped we would be 1 year into my time at Newell Rubbermaid. As you know from our press release, we've reaffirmed our full year guidance. Before exploring the factors that could influence full year delivery, let me walk through the highlight reel for Q2 in the first half. As you know, Q2 was a complicated quarter as a result of SAP implementation in EMEA. There were no big surprises in the SAP transition, and in fact, I was very pleased with the execution of the program. To protect shipments through the Q2 startup window, we pulled about $28 million in net sales from Q2 into Q1. This pre-buy in Q1 and then the deliberate startup of our order management systems in Q2 limited our merchandising activity in the quarter, resulting in less sales than would otherwise have been delivered in a normal quarter. Adjusting for the impact of the SAP pre-buy, but reflecting the absence of the merchandising in EMEA, Q2 core sales were up 2.3%. In Q2, our Professional segment had another very good quarter with core sales growth of 4.6% excluding the impact of the SAP shift. For the first half, core sales in the Professional segment rose 5.3%, with all 4 global business units contributing to the increase. The 5.3% core growth in Professional was achieved against a full year core growth rate in 2011 of nearly 6%, so strong momentum and good growth on growth as we invest project renewal savings into the professional segment selling systems in the fast-growing emerging markets. Our Consumer segment has had a tougher start to the year. In Q2, core sales excluding the SAP timing shift were nearly flat, declined 3/10 of a percent. This is an improvement versus Q1. Despite good results in our writing and creative expression GBU, we continued to have challenges in our Décor business and an increasingly difficult macro environment impacted our European Fine Writing brands. While our Décor operational issues are largely resolved as we exit Q2, the recovery has been tempered by a change in corporate strategy at our third largest customer in this category, JCPenney. JCP's new everyday low price approach has adversely impacted our highly merchandising sensitive Décor business, and we now expect this impact to persist until our partner's new strategic vision is fully implemented in our categories. These 2 factors, European macro impact on Fine Writing and the JCP challenge, drove the Consumer segment decline in the first half and will put pressure on our Consumer results through the second half of 2012. These impacts are reflected in our full year guidance at current but not worsening levels. Our Baby & Parenting segment delivered another strong quarter in Q2, with core sales growth of 7.3%, excluding the SAP timing shift. First half core sales grew 13%. We continue to make progress on Baby & Parenting with improved POS in Graco in North America and sustained stronger momentum on Aprica in Japan. While we still have work to do, we're encouraged by these first half outcomes and are increasingly confident in our ability to deliver a good set of results in 2012. In total, our first half core sales growth was 2.5% and is slightly ahead of where we expected to be at this point in the year. Core sales grew in 6 of our 9 global business units, 3 of those 6 over 5% and 2 of those 3 over 10%. Our top 14 brands, which represent about 85% of our revenue, grew core sales nearly 5%, with standout performance on Aprica, Paper Mate, Lenox, Graco, IRWIN and Sharpie. We continued to deliver strong emerging market core growth of about 14%, with 13% core growth in Latin America and nearly 18% core growth in Asia Pacific in the first half. Core sales in the developed world grew about 1%, with North American core growth of 2%, partially offset by an EMEA core sales decline of a little less than 6% in the first half. We estimate EMEA's underlying decline to be about 4% when adjusting for the SAP transition related to the absence of merchandising in the February through May period. Our Win Bigger categories grew core sales nearly 4%. Our Incubate for Growth categories grew over 13%. While our Win Where We Are categories declined about 4%, driven entirely by Décor. Underpinning our performance are some notable achievements. Our Industrial Products & Services business continued to drive strong core sales growth both domestically and abroad. After adjusting for SAP, Industrial Products & Services delivered their 10th consecutive quarter of double-digit core growth. Year-to-date, our Lenox brand core growth was well over 10%. The IRWIN brand delivered its 7th consecutive quarter of greater than 5% core sales growth. We're seeing strong results from our IRWINization marketing and merchandising initiatives. Year-to-date, IRWIN core growth was nearly 10%. In the U.S., new innovations on Graco are resonating with consumers. The Graco FastAction and Ready2Grow travel systems are driving significant market share gains. Graco's first half growth was over 10%. In Japan, Aprica's success story continues. We're investing to sustain the momentum in the business as we anniversary the strong year ago growth and competitors respond to Aprica's significant share gains. Aprica has been our fastest growing brand in the first half, delivering strong double-digit core growth. In Asia, our Fine Writing business continues to perform strongly. In Q2, we launched Parker Ingenuity with Parker 5th Technology in China while sustaining terrific growth across the balance of Asia. Parker delivered strong double-digit core growth in the first half in Asia. Our Writing and Creative Expression brands are driving category growth in the U.S., outpacing the total category growth rates by more than 2 to 1. Paper Mate has now taken the #2 share position in the total writing category in the U.S. as a result of the terrific success of Paper Mate InkJoy. Globally, both Sharpie and Paper Mate delivered over 5% core growth in the first half. As I mentioned earlier, we're also making good progress on our change agenda. In Q2, we successfully went live on SAP in Europe and are operating in an EPC model as of early April. Our team submitted to the transition extremely well, and we expect to be back to normal merchandising levels in the back half of the year. In the U.S., we continued to build out our new customer development organization. We've seen some early wins, most notably an Office Depot Rubbermaid partnership under which Rubbermaid storage products will be sold nationwide at Office Depot retail stores and online. On the cost side, our Project Renewal efforts are on track to deliver $90 million to $100 million of savings by the first half of 2013. In Q2, we rationalized capacity by closing a significant Rubbermaid Consumer facility. We're also executing distribution-centric consolidations in Rubbermaid Consumer and Rubbermaid Commercial. The benefits from these efforts will start flowing through the P&L in Q3. Beyond Project Renewal, we're starting to see the early read-through of savings from our initiative to reduce indirect procurement spend. Our goal is to reduce indirect procurement cost by $50 million in the U.S. by the end of 2013, and we have made significant progress against that goal in the first half. We've also identified $100 million in working capital savings over the next 3 years. SAP is a key enabler to better working capital management. And with over 80% of our business now on SAP, I feel confident that we have the tools to work more efficiently and free up trapped cash for more productive uses. On balance, we have good visibility and made progress on costs. And we began to reinvest some of these benefits into our selling systems on our Win Bigger categories in Latin America in Q2. We expect the pace of reinvestment to pick up in the second half of the year as we develop new e-brand building digital assets on a number of key businesses. So we delivered good first half results, and I hope you feel as good as we do that we're getting the business into a more consistent and predictable cadence of delivery. Let me now make a few comments on the balance of the year. As a reminder, we've guided full year core sales to increase between 2% to 3%, normalized operating margin to increase up to 20 basis points, normalized EPS to increase 3% to 6% or in the $1.63 to $1.69 range, and operating cash flow between $550 million and $600 million. As I've said, given our first half results, we are reaffirming our full year guidance. There are 4 key factors that could influence where we fall in our guidance range. The first factor is our performance on our Writing & Creative Expression brands through the back-to-school season. We are very well positioned for an excellent back-to-school season with a stronger Q2 sell-in than last year, better merchandising placements and good U.S. market share momentum on Paper Mate, Sharpie and Expo. The customer development teams and our retail partners have put together a good set of plans. Of course, we need the consumer to convert our merchandising placements to purchase, and then we need our customers to place replenishment orders for our business to see the revenue benefit in the P&L. Remember, the back-to-school formula for success is strong sell-in, plus great sell-through, plus strong replenishment, that equals great Q2 and great Q3 in Writing & Creative Expression. If any of those variables are off, the season is off. Sell-in Q2 was stronger than prior year, and the merchandising placements are stronger as well. So far, 1.5 boxes checked out of 3. We need to see sell-through and replenishment. Our guidance assumes we checked all 3 boxes. The merchandising season is just kicking into high gear, so we'll find out soon enough. The second factor influencing full year delivery is the continued recovery of our direct core business and the speed with which JCP migrates gear sets to their new merchandising vision. Our full year guidance assumes positive resolution of our operational issues in Q3, and we are largely there with all of our service metrics back to standard as we speak. We have assumed in our guidance that the adverse impact of the changes at JCP persist until they activate their new strategy in our categories next year. The third factor is the macroeconomic environment in Europe. Conditions have worsened through Q2, and were a little more difficult than we anticipated when we most recently spoke in May at the Analyst Day. The most significant impact is in our European Fine Writing business, where traditional stationary stores, which make up nearly 40% of our Fine Writing business, are under real pressure. We expect the European pressure on Fine Writing to continue into the second half of the year, but to not worsen. The fourth factor that could influence where we fall in the guidance range is foreign exchange. Through mid-year, we've experienced about $0.01 of adverse EPS impact from ForEx, about $0.02 better than what we originally anticipated. Our guidance assumes the last few days' rates hold for the balance of the year. If they do, EPS will be adversely impacted by about $0.02 more in the second half of the year than what we were anticipating when we previously guided. So rather than flowing about $0.03 negative in the first half and about $0.02 negative in the second half, the ForEx impact was about $0.01 negative in the first half and will be about $0.04 negative in the second half with the skew to Q3. Importantly, when the ForEx pressure just mentioned is coupled with the reversal of our Q3 2011 management incentive plan true-up of about $0.04, which I've mentioned in our previous earnings calls, our ability to deliver Q3 2012 EPS growth versus prior year becomes really difficult. All that said, we have a number of positive things happening in the business and despite the challenges and uncertainties articulated, we continue to have good visibility to cost and earnings and continue to suggest that the middle of all 4 of our full year guidance ranges reflect our balanced view of what we can achieve in 2011. With that, let me hand over to Juan for a more detailed look at the numbers.

Thanks, Mike, and good morning, everyone. Net sales for the quarter were $1.5 billion, a 1.9% decrease versus the prior year. Core sales, which exclude the impact of foreign currency translation, increased 0.4% or a 2.3% increase after adjusting for the EMEA SAP pre-buy. In North America, net sales grew 2.2%, and core sales grew 2.5%, led by very strong growth in our Professional and Baby & Parenting segments. The Consumer segment's North American core sales were essentially flat in the quarter as challenges in the Décor business were offset by stronger back-to-school sell-in. Outside North America, net sales decreased 13.1% or 5.4% excluding ForEx. Both Latin America and APAC, which as you know are priority growth markets for us, delivered another quarter of double-digit core sales growth, with Latin America increasing 14.9% and APAC increasing 12%. In EMEA, core sales declined 20.9% mainly due to the SAP implementation, including the previously mentioned pre-buy, plus the temporary halt in merchandising efforts related to the cutover period, all exacerbated by the impact of the worsening tough macro environment in Western Europe. Gross margin was 38.3%, representing 50 basis point improvement over the prior year ago quarter. Pricing and productivity more than offset a 90 basis point negative impact from input costs inflation. Normalized SG&A expense decreased $4 million compared with the prior year and on a percentage of sales basis, increased 20 basis points to 24.7%. A stronger dollar drove $10 million of the expense decrease. On a constant currency basis, SG&A spending was up $6 million, all driven by strategic spend which rose 40 basis points as a percentage of sales. The increased spending focused on demand creation activities in focused growth areas. Sales force expansion in the Newell Professional segment, where we are showing continued strong growth trends was one of those focus areas. And in our Consumer segment, support for the launch of InkJoy and geographic expansion in the Writing business was another. Reported operating margin of 12.2% compares to 12.7% in the prior year. The decline is due to increased restructuring and related costs arising from Project Renewal, which started flowing through the P&L in Q4 of 2011. Operating margin for the quarter on a normalized basis increased 40 basis points to 13.7%, driven by gross margin expansion. Interest expense for the quarter was $20.5 million, compared with $21.3 million in the previous year, which was slightly higher than anticipated due to the timing of debt issuance related to the redemption of $437 million in outstanding junior convertible subordinated debentures related to our 5.25% quarterly income preferred securities, most often referred to as QUIPS. During the quarter, we issued $500 million of medium-term notes in 2 tranches: $250 million of 2% 3-year notes and another $250 million of 4% 10-year notes. We also initiated the redemption of the QUIPS in Q2 and completed this transaction in early Q3. This refinancing will improve our cost of borrowing over the term of the notes and eliminate any potential earnings dilution associated with the convertible feature of these securities. We anticipate annualized interest savings of approximately $0.02 per diluted share as a result of this transaction. Due to the negative carried costs during the notice period, the benefit in 2012 is expected to be less than $0.01 per share. The reported tax rate for the quarter of 32% represents a 17-percentage-point increase over the prior year. The increase primarily relates to discrete items recorded in each period. In the current quarter, we recorded $11 million in tax charges for the impact of the European transformation plant had on our tax reserves and valuation allowances. We expect to recognize approximately $7 million in additional related tax charges during the back half of the year. As you may recall, the last year rate includes a $0.07 per diluted share tax benefit related to the reversal of tax contingencies due to the expiration of various worldwide statutes of limitation. Our normalized tax rate in the second quarter was 25.8%, compared with 26% in the prior year quarter. Operating cash flow in the quarter was $103.1 million or a $10.3 million improvement over the prior year quarter, mainly due to lower non-operating working capital. We are making good progress on our working capital initiatives with a notable 3 days reduction in inventory versus the prior year. Our progress against payables will begin to show in our DPO in the second half as there are some temporary items that are impacting progress in Q2. We returned $54 million to shareholders in the form of $29.1 million in dividends and $24.9 million paid for the repurchase of 1.4 million shares. We have repurchased 5.7 million shares at an aggregate cost of $87.4 million since inception of the program in the third quarter of 2011. Turning now to our 2012 Outlook. As Mike covered earlier, we are reaffirming our full year guidance. We expect full year core sales growth of 2% to 3%. With the dollar strengthening against currencies, we're now increasing the expected foreign currency translation impact on sales for the year to an estimated negative 2%. This assumes average exchange rates for the balance of the year remain around recent spot rates. We anticipate normalized operating margin to expand by up to 20 basis points. This guidance reflects our expectation that we will generate gross margin improvement as productivity, improved product mix and pricing more than offset inflation and that we increase strategic SG&A spend to support our growth game plan. We expect interest expense to come in slightly below $80 million, with debt reduction to occur in the second half of the year. Our normalized full year effective tax rate for 2012 is projected to be around 26%. We expect 2012 normalized earnings per diluted share between $1.63 and $1.69, or about 3% to 6% growth. This EPS guidance excludes between $110 million and $130 million, or $0.27 to $0.32 per diluted share, of planned restructuring and restructuring related costs associated with the European transformation plan and Project Renewal, as well as $18 million or $0.06 per diluted share, related to the 2012 cash tax charges expected to be recorded for the European transformation plan. Although we still expect about $0.05 per share of unfavorable foreign exchange, we now believe the timing of that impact will be largely realized in the back half of the year. Operating cash flow is expected to be between $550 million and $600 million for the full year, including $110 million to $120 million in restructuring and restructuring related cash payment. Capital expenditures are projected at $200 million to $225 million. In summary, with Q2 behind us, in spite of tougher macros in Western Europe, our financial outlook on the year remains essentially unchanged. As is always the case in business, we've had some puts and takes. We're more challenged in certain areas than we initially expected, namely in foreign exchange, in Europe due to the macro issues and in our Décor business. But we also have good momentum in other parts of the portfolio, including Baby, and in the majority of our Professional business. So at this point, we believe the risks and opportunities are relatively even balanced. And if things play out the way we see them today, that should put us somewhere in the middle of our guidance metrics for the full year. So in conclusion with our strategy in the early days but gaining momentum, our first half results give us confidence in our ability to deliver on our full year guidance. With that, I'll turn it back over to Mike.

Thanks, Juan. It's hard for me to really believe that a year has passed since I started in this role. Time has just really flown by. We packed a lot in, and I think there's a lot of be proud of. Despite a very tough environment, operational issues on Baby and Décor, SAP implementation in Europe and the change associated with Project Renewal, over the past 12 months, we've delivered 3% core sales growth, expanded normalized operating margin by 50 basis points and increased normalized EPS by 10.7%. In the same time frame, we've strengthened the balance sheet by paying down $0.5 billion of bond maturities, increased our access to credit at attractive terms through a new $800 million revolving credit facility, improved the capital structure of the company by refinancing our QUIPS at more favorable rates and deployed a more tax-efficient business model into Europe. We also increased the dividend payout by nearly 53% versus the prior 12 months and returned an additional $87 million to shareholders through our new $300 million, 3-year share repurchase authorization. These outcomes are a credit to the team and demonstrate that we're capable of delivering results, driving change and creating value for our shareholders. All that said, my focus is on the future. I am clear today that the possibilities for Newell Rubbermaid are greater than I imagined when I first took the role last July. My confidence in our ability to play for the upside strengthens with every hurdle we clear. I don't expect an easy ride given the state of the global economy. And as a result, we'll continue to assume and build plans that contemplate tough macroeconomic times ahead. Of course, the big picture for Newell stretches well beyond macro pressures with the quarter-to-quarter issues in the business. The strategic opportunity, which is captured in the growth gain plan, is significant. And the ambition to build a larger faster-growing, more global, more profitable Newell Rubbermaid is there for the taking. There's no doubt we're on our way, but there's much more to do. We've only just begun to build out our geographic footprint to the faster-growing emerging markets. We're only getting started on the exciting possibilities of e-commerce and e-brand building. We've only had our new customer development teams in place for a few months, and they're just beginning to make an impact. And our brands and innovations are hungry for support. When we get the support on our businesses at the right level and in the right way, we see great results. So a good start for sure, but much more opportunity ahead of us than behind us. The growth game plan has been cascaded deep into our organization and will shape our agenda over the next number of years. It's about activating a clear set of portfolio of choices, reigniting the entrepreneurialism that's in the heart of every one of our brands and building 2 towering capabilities of equal stature -- one focused on the development of our growth ideas and the other focused on execution and creating commercial value from those ideas in the marketplace. To activate this growth agenda, we need to continue to release the trapped capacity for growth. We've taken the first step to simplifying our organization with Project Renewal, but we need to continue to drive out costs that do not create demand. There is a significant opportunity here, and where we have attractive cost reduction ideas that yield a good return and enable more of our resources to be invest invested in growth and strengthened capabilities, we are going to take them. You've seen in our near in plans many of those ideas over the last 12 months and there will be more to share. Releasing the traffic capacity for growth is inextricably linked to our opportunity to accelerate results and drive shareholder returns to higher levels. As I hope you can tell, I'm excited about playing for the upside at Newell. We've laid out a clear and aggressive strategy. Now it's all about decisive leadership, strengthened execution and the deployment of the right resources to drive the growth game plan into action. With that, let me open it up to questions.

[Operator Instructions] So operator, we'll take the first question.

[Operator Instructions] Your first question comes from the line of Bill Schmitz with Deutsche Bank.

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

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

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

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

Okay. And then no change in the sell-through?

It's too early to know in back-to-school. I mean, we're just really kicking in now. I'm -- look, I think the headlines here are, we've got better sell-in than we had last year. We've got better share momentum on the 3 big brands that will get merchandised heavily in back-to-school season, which is Sharpie, Paper Mate and Expo. In fact, our writing shares as a percent of the total writing market are up nearly 150 basis points in the first half of the year. And Paper Mate went from being the #3 brand in the total writing category to the #2 brand in that total writing category in the first half. And we have that momentum sustained right through, right through the month of June the last share numbers I saw. So we're coming into back-to-school, and we have better merchandising placements, better -- higher displays, et cetera. So we're better positioned. But as you know, it's about converting all that stuff that you do upfront to purchase from the consumer, and then it's about our retailers' point of view on their inventory positions as to whether we get replenishment orders after the back-to-school season. So there's a lot to unfold over the next 3 or 4 weeks, 5 weeks.

Your next question comes from the line of John Faucher with JPMorgan. John A. Faucher - JP Morgan Chase & Co, Research Division: Mike, I think you said that the impact of the lower merchandising on the European business was 2%, right? So it was down 4. It would have been sort of down 2 without the extra merchandising. Can you talk a little bit about sort of how you're layering the normal level of merchandising back in? And sort of following up on Bill's question, are you seeing any difference in the cadence over time in terms of European demand either on an underlying basis sort of either decelerating or accelerating from that standpoint?

It's a good question. Remember, what I -- I think I've said this a couple of times along the way. We're not going to try to make up for lost merchandising from the first half of the year in the second half of the year. I don't want to do that because I worry about the competitive response to increased frequency of merchandising or greater depth of price points in the second half-year. So rather than have that money flip into the merchandising when we flip into the back half of the year to increase frequency, we're just going to get back into our normal rhythm. And we are -- I think we'll be fine in terms of being back in that rhythm we are right now than we will through the third quarter and into the fourth year. John A. Faucher - JP Morgan Chase & Co, Research Division: Got it. And then sort of any sort of the change in cadence over the course of the quarter or into the third quarter in Europe or is it just all pretty much...

The only underlying -- look, there's a lot of pressure in Europe. And as you recall, our sort of underlying declines are around 3% to 3.5% as we exited last year and into the first quarter. Part of it -- part of the issue in the optics of our numbers in Q2 have to do with the SAP pull forward. So you don't have to -- I wouldn't overreact to the double-digit decline in EMEA that you see. So if you adjust out for that, it's about an 8% decline in the quarter. A portion of that has to do with the lack of merchandising. It's not a small amount, so roughly in line with what you said, about 2 percentage points. We have some timing things that happened at the end of the quarter. We didn't shift the last 3 days of Q2 in Europe as part of our SAP transition in the first hard close in an EPC environment. So part of that is artificially -- has artificially pressured our results in Q2, as well as in EMEA. But the fact is that we have some underlying issues in Europe related to the macros, and they are most acute in our Fine Writing business. And what's interesting about it is it's the smaller stores, so that represents probably about 40% of our revenue in Europe, and it's actually the price points that are less than $100, where we're having the issues. And it makes intuitive sense if you think about it. If you're a wealthy person in Europe, you have money to spend. So if you want to buy a $250 or $300 pen, you can. And our business looks fine in that segment. Our under $100 offerings are sort of tweeners. It's the best way to describe it between everyday writing instruments and prestige writing instruments. And that's where the pressure is. And those tend to get sold at some of the smaller stationary stores, which represents about 40% of our business. That piece of our business is really feeling the heat. And that accelerated in the first half of the year. And we've in our guidance range, contemplated that for the back half. But that's something we need to figure out because at the moment, despite really strong double-digit growth in Asia on our prestige Fine Writing business, we're losing it all, giving it all back in Europe on this sort of mid-tier segment that's under pressure. And that's a real issue. That's going to cost our roughly 3.5% underlying performance to be worse as it was towards the second half of Q2. And we have made the assumption that, that carries forward with us into the second half of the year.

Your next question comes from the line of Chris Ferrara with Bank of America.

So I wanted to move to the U.S. And very recently, we've heard a lot of discretionary -- semi-discretionary companies talk about this cadence that Bill and John were referencing except more in the U.S., right, falling off and you've seen demand destruction. And I noticed kind of in the 4 things you named for what would affect where you landed in your guidance, the U.S. wasn't one of them or U.S. macro wasn't one of them. And frankly, your U.S. macro or your U.S. growth accelerated this quarter, right? So exclusive of back-to-school, like, I get back-to-school sell-in was good, but generally, your categories, your businesses outside of back-to-school, I mean, what are you seeing in the U.S.?

Look, part of our professional momentum is driven out of excellent execution on industrial products and services in the Irwin brand, so Lenox and Irwin, in the U.S. And so we've seen strengthened momentum there. Some -- and we have continued momentum on Rubbermaid Medical, good double-digit growth. I really didn't call that out. And then of course, I think the positive data in the second quarter -- the most positive data in the U.S. in the second quarter has got to be our Baby performance, where we're seeing very good consumption gains and share gains despite all the headlines you read. I don't know if you saw the report this morning on birth rates, some negative report on birth rates in the U.S. suggesting they're at the lowest levels in 25 years. So despite that, and I honestly -- some of these macro issues I tend to -- European things are really acute. But things like the birth rate data, that's just sort of the cost of doing business. So your brand has got to carry the day. You have to have better innovations. And we are starting to see that. So I think the U.S. -- I'm pleased with the U.S. results. We need the U.S. to perform well, and we're getting that from Baby and from Professional. We've got some challenges in the Consumer segment aside from our Writing & Creative businesses -- Creative Expression businesses, and that's largely in Décor. But I can't say that I'm disappointed. I'm actually pleased, and I think part of this is a reflection of the strength of our brands, and part of it is the impact -- the early impact of the CDO.

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

No, I mean we've got a slight improvement in our resin outlook for the back half of the year, but we still believe we're going to experience about 100 basis points of inflation in the back half, an adverse impact in gross margin. And while resins more favorable, we continue to have pressure in metals and source goods and in the other commodities that we're dealing with, like paper in the packaging. But yes, moderated because remember, we talked about at the beginning of the year about 150 basis points of negative impact in gross margin related to inflation. Back half of the year, we'll be closer to 100 as resin inflation has moderated. The thing about our resin -- the resin impact for us is we think we see some benefit in Q3, but we don't see much benefit in Q4, at least in our outlook. And the other thing to note is we lose the pricing leverage in gross margin as we move through Q3 into Q4 because remember, most of our pricing benefit in gross margin relates to 2011 pricing actions and the carryforward of that. So I think our comparisons get a little easier on gross margin in the back half of the year. I think our gross margin is about where we would hope it would be. I'm pleased with it, the progress. And we're going to need to count on productivity mix and strategic pricing where we can get it to compensate for what will still be about 100 basis points of inflation in the second half in gross margin, albeit less than what we have originally anticipated. On your ForEx point, Chris, I mean, the thing to note on ForEx is that we're in the range that we suggested we would be on the full year. We said there would be about $0.04 to $0.05 of impact when we guided back in -- when we first guided back in January. We actually did better on the ForEx line in the first half year, so some of our EPS overdelivery in the first half is related to -- to relative to our forecast -- is related to a more favorable or a less -- the best way to say it, it's a less negative impact in the first half than we've originally anticipated. So it's about $0.01 of adverse ForEx impact in the first half. The dollar has strengthened since late April, pretty substantially. And I know it's bouncing around quite a bit; it bounces around every day. But part of that favorability reverses out -- part of that first half favorability versus the guidance reverses out in the second half. And that's why I've said the flow sort of shifts. We anticipated $0.03 adverse in the first half, $0.02 adverse in the second half in EPS. And it's really -- it's likely to end up if things hold as they are today, $0.01, $0.04.

Your next question comes from the line of Bill Chappell with SunTrust.

I would actually just follow up on Chris's question. As you look at commodities for next year, I mean, is there a tailwind? Are you looking into kind of locking in some of the costs now? Or are you just going to wait as the year progresses?

We've got a pretty -- and I mentioned this, Bill. You and I have talked about this a little bit, and I mentioned this on prior calls. We've got a pretty sophisticated resin buying office here, given the amount of resin that we buy. And so we'll leverage all the options at our disposal, that are financially prudent for us to leverage. We're not going to -- I don't want to be in the trading business or take the risks associated being in the trading business. But I'm quite happy with the way our resin commodities are bought. The thing that -- it's more of a drag on us at the moment, it's our source goods inflation. And if you recall from earlier conversations we've had, we had a bunch of contracts that expired, that were long-term contracts, at the beginning of the year, and we had to lock in at higher labor rates. And so as a result, you end up with an inflation impact on our source goods that flows through the full year. And I think at some point, you may want to lay out a little more detail how significant our source goods are in cost of goods because it's a pretty important variable for us. And when we have inflation there, we end up with a pretty significant impact on the total company.

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

Great. And just a following-up. We're still kind of new to the 3 categories of Incubate, Win Where We Are, and I guess, Win Everywhere. I'm just trying to understand...

All the time. It's where we wanted to be, Bill. It's Win Where We Are, it's Incubate, and it's Win Bigger.

I mean, how should we look at the fact that Incubate was the fastest growing this quarter? I mean, in particular, at some point there's infant -- Baby and Infant kind of get out of the Incubate category. Are they out of the woods? And should I worry that one is growing faster than the other in a given quarter?

No, I mean there are couple of -- there's a bunch of businesses in there. I mean, Baby is by far the biggest piece of our Incubate categorization. And as you recall, we put Baby in there for a different reason than we put the other ones in there. We put the Endicia and Mimio and Rubbermaid Medical in there because they really are ventures and we don't want them subsumed into the operations of their bigger parents. So we want them insulated so that they can build their repeatable growth models. And they're doing well. Double-digit growth on Rubbermaid Medical. Very, very strong growth on Endicia, which is a competitor to Stamps.com. Great business. We were just out there in Palo Alto. And then Mimio's dealing with all the headwinds associated with the pullback in municipal investment associated with budget management, et cetera, in the education space. So we've got 3 different businesses that are insulated as incubators. And then we've got Baby there. And we put Baby there because it needed an intervention. And we made that intervention both at the management team level and then in the reporting structure. So we brought it directly into me, and I've gotten closer to that business than I am in other businesses as a result of the problems we had in the first half of last year. Strategically, I expect us to leave it there for the foreseeable future because despite our efforts to get it back into recovery, which we are going to be able to do, we have a challenge in our portfolio which is because of the margin structure in this business, you would not make a big investment behind it if it caused you to mortgage other Win Bigger categories, like our Professional portfolio and our Writing portfolio, for the sake of developing the business outside of the markets that it's in. So obviously, I'd love to play for China on Baby -- 18 million births versus a 3 million here. But until we get that structurally shifted, it needs to stay where it is and we need to figure out how to unlock that opportunity because otherwise, we won't play for that Chinese opportunity in as big a way as we could. So that's why it sits in Incubate because it requires a strategic intervention. It required both an operational intervention, which Kristie and her team are well on their way on. But for the long haul, it requires a strategic intervention because even with double-digit OI margins, which we are beginning to get towards, big step changes in operating income margins, which I'm pleased with and Kristie and the team deserve terrific credit, so does our partner for enabling and helping us to get there. But for us to get and play for China, we need probably another 300, 400, 500 basis points of margin in this business. And so that's going to require a big shift and a real rethink. And that's what we -- that's why need to leave it in Incubate for the foreseeable future because we've got to get the recovery bedded down. And we can grow this business without doing what I just described. But if we really want to play it as the third leg of our Win Bigger strategic agenda, we have to find the different mechanism to change the dynamics there. And so that's why it is where it is and that's why I envision it staying in that categorization for the foreseeable future because it's going to take lot more work to get that piece of the puzzle figured out.

Your next question comes from the line of Lauren Lieberman with Barclays.

Just a follow-up on the Baby conversation. So one, was just a surprise at it's still being so strong not just because you've sort of been fairly cautious after the last quarter. But we had thought there probably have been some effective pull forward just by virtue of how big the Walmart promotion was in Q1. So can you just talk a little bit about where the surprises were in North America this quarter? I know you're saying the birth rate -- you've got to grow regardless of what the birth rate is. But this is a dramatic change and not just -- you've got easy comps, but you also -- it is a really difficult sequential situation.

Yes. We've got -- there's 2 things that have happened that were pleasing in the second quarter. Number 1, and I'll talk outside the U.S. for a second. In Q2 of 2011, we saw our first step-up in Aprica performance in Japan. And probably the most pleasing thing that occurred in Q2 to me as we lapped what was double-digit growth in the prior Q2 period, we delivered double-digit growth in the current period. So Aprica is on a roll. I mean, I think that's one headline I will give to you. I think it gets tougher as we move through Q3 into Q4 because we're beginning -- I was surprised that our competition hasn't responded very aggressively in Japan yet. And we know, through the normal ways you do competitive intelligence, that they're coming with some stuff in Q4. So we're going to have a tougher comp, not just driven by the year-ago comparisons, but as a result of in the back half of the year, stronger competition. All that said, I love what's going on in our Japanese Baby business. It's got a great leader there in Mayada-san [ph] working for a great leader in Kristie, and these guys are all over it. So I do think it gets a little bit tougher in the back half of the year, but I'm pleasantly surprised by the Q2 results on Aprica. I mean, there's other good news in Baby, which is the FastAction innovation and some of the other innovations we've got executing in and flowing into the marketplace in Q2 are having a good impact. Our POS is up in the U.S. pretty nicely in the second quarter. So yes, you're right, the Baby Days event was a Q1 event, which was earlier, but we've got -- and so Walmart had a very strong Q1, and hence the comp a less strong Q2. But we've got momentum in other places in the U.S. as a result of a really good effort on the part of the customer development organization and strong engagement from the leadership with their retail partners. And we have better innovation. So it's the fundamentals that are starting to kick in. Does competition respond more quickly in the U.S. than it did in Asia? Probably. It's a more dynamic market but on balance, we're feeling a little bit better about the first half. Now the only thing I would say about our first half performance is you should recall that the first half of 2011 is by far the easiest comp we're going to have. So we delivered 13% core sales growth in the first half of 2012, up against 12% declines in the first half of 2011. So it obviously gets harder from here. Q3 '11 was a down quarter, but not nearly as down as the first half of '11. And Q4 was an up quarter in 2011. And so, it gets tougher, but that's why we pay Kristie the big bucks.

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

It's combination of both. I mean, we've done a lot of things on the cost side and structural SG&A really quickly. We're not -- we haven't made a big bet on Baby. Whether we can hold double-digit operating income margin or not in the second half year on that business, actually don't worry about it because I want to make sure we invest to sustain the growth momentum there and get the fixed cost leverage. So we'll see what happens in the second half year, but we're going to start to spend a little bit more behind this business because we have better innovation coming. We actually have better innovation coming at the end of this year into Europe as well. So if you look at our business, 3 geographies really matter. It's North America, it's Asia, but that's really Japan, and it's Europe. 2 of the 3 are beginning to do really well. One is doing extremely well. One is beginning to get its sea legs, that's North America. Europe is still a drag on the business, and that's going to continue until we get to the end of the year when we get the innovation out. But I want to make sure we're spending enough to make that innovation land with impact and so we may give a little bit it back on operating income margin on that business in the second half of the year.

Your next question comes from the line of Joe Altobello with Oppenheimer. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Just a couple of questions, actually. First, just wanted to go back to the U.S. for second. And I know you guys have touched on this a little bit earlier in the call. But in terms of what you saw on the part of your retailers and their willingness to carry inventory either late in 2Q, early 3Q, have you noticed an increased cautiousness there at all?

Look, I mean, we -- as you know, Joe, the thing that impacts revenue is the change in the change in inventory behavior, not just the inventory pressure. There's always inventory pressure on businesses because retailers are -- their key metric is return on the invested capital, so it's obviously an important thing for them to leverage. There, the drum beats out there. I think the negative headlines on the macros tend to cause retailers to be more cautious. And there we've seen at points in time where our -- because we have visibility to this. We have POS data. We know what our retail sales are by customer. We know what our inventory positions are by customer. When we get out of balance, we see retailers adjusting to get us back in balance so that the rate of inventory growth relative to the rate of sales growth is in sync. So there's -- in any given moment, you've got those normal fluctuations going on. There are some retailers that are pressing harder in Q2 on inventories, but I don't like to talk about it unless it's a huge deal. We felt that a bit in our Décor business, and we felt that a bit in our Cookware business. And I suspect in both of those categories in the second half of the year, we'll see and feel that kind of pressure continue. But it will be a question mark on Writing & Creative Expression, and it will be reflected in the replenishment orders we get post back-to-school as to whether the office superstores and the mass guys who have taken strong positions upfront, whether they are as confident in the category sustaining its growth rate going beyond back-to-school. And that will influence the choices they make. So we have to be prepared for that risk at the end of Q3 and into Q4 in Writing & Creative Expression. And we can't control it, so we just try to manage the sell-in against what we think the sell-through is going to be, so that we get the consumption to play out and we get that balance, such that we get the replenishment orders. But it's not science; it's art. And we can get that wrong, and we won't know how that story is going to play out until the consumption, the sell-through, occurs in the month of August into the middle of September. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay, that's very helpful. And then on the SG&A line, the strategic investment this quarter, I think it was up 40 bps. It was up 90 bps in the first quarter. What are you expecting for the second half and what's baked into your guidance?

We don't guide on -- and I haven't really commented, Joe, on the forward-looking numbers. That said, we've begun to invest renewal savings in the second quarter behind selling systems in Latin America, largely on the Professional business, but also on Writing in Brazil. And we will begin to broaden that investment to include the investment behind the creation of new digital assets for our e-brand building and e-commerce initiatives in the Consumer segment. But I'm cautious about going hog wild on that investment until I see how the macros play out. I'm more conservative here than maybe you guys think I am. I'm not going to throw the money out there until I'm really sure. Now that said, I would expect strategic SG&A to be up in the second half of the year versus prior year. The one thing I would say in some of those numbers is you have to remember that part of that will reflect the true-up dynamics on our management incentive programs versus prior year. So it's not all working money because remember, our product marketing folks and our selling resources are in strategic SG&A. So last year, we paid out our bonuses very low. We've got the true-up that's in our back half numbers in the third quarter, and that a part of that, not all of it, but a part of that is sitting in strategic SG&A. So some of the increases that you might see will be sort of artifacts of that dynamic.

Your next question comes from the line of Budd Bugatch with Raymond James. Budd Bugatch - Raymond James & Associates, Inc., Research Division: I just would like to go through looking at the Professional and Baby & Parenting. You had revenue increases in Professional from quarter to quarter, from first quarter to second quarter, and flat in Baby & Parenting. And yet the operating income in each declined, so the contribution pull-through didn't look like it was there. Can you kind of maybe give us a little bit of drill-down as to where that was and what caused the operating income to decline in each of those?

Yes, I think the thing to remember, Budd, is that on the reported numbers, you have the SAP effect, so you have the revenue that has been shifted. And the gross profit, obviously, that was connected to that revenue shifted from Q2 to Q1. But to be -- so that's a big chunk of it and probably the most significant chunk of it on Baby. On Tools, though, we are investing in selling systems -- on Professional, sorry, we're investing in selling systems, largely in Latin America -- Brazil on our Tools business, across Latin America on IP&S, in China on IP&S in Latin America on Commercial. And we are also putting some money behind Rubbermaid Medical in terms of selling resources in the U.S. So the drag on operating income margin, once you net out the SAP effect on the Professional portfolio, is related to those investments. And that's part of that Renewal money that's going into that. Budd Bugatch - Raymond James & Associates, Inc., Research Division: So just to be clear, if I parse those out of the expenses into gross profit or cost of goods sold and SG&A, you're saying in Professional, it's basically the strategic SG&A investment that's building it? In Baby & Parenting, it was a reduction in gross margin due to the SAP shift? Is that the way to look at it?

Yes -- no, gross margin didn't go down. It's absolute -- it's about the absolute -- it's about the fixed cost leverage of not having the revenue and gross profit dollars in Q2 on Baby. On Professional, it's a combination of that and what I described as the incremental SG&A that we put -- strategic SG&A that we put behind the business. So it's 2 things on the Professional portfolio.

Your next question comes from the line of Jason Gere with RBC Capital Markets.

Mike, I guess, I just want to first talk about -- I know the layout of the year was the first and fourth quarters are going to be strongest. So from a sales perspective and the kind of the buckets that you've laid out for some of the incremental pressures, it feels like the third quarter sales will probably come in a little bit lighter than expectations just because of the Décor business and the turnaround there. So as you think to the fourth quarter on the Consumer side, are there any incremental merchandising plans that you have in place? And I guess, what gives you that confidence that the sales can really accelerate, especially when you have the toughest comp? And then I just have a couple of follow-ups. :p id="79344716" name="Michael Polk" type="E" /> Yes, I mean we've got a good underlying share momentum in our businesses for the most part. So if I look -- I think that's one of the big contributors on the Consumer side as to why you'd expect the momentum to continue. Remember, InkJoy just began to sell in the second half of the year. So we've got some dynamics like that, that are positive. We've got a dynamic on Calphalon, where we have to lap the inventory pipeline on JCPenney. And we've got the JCPenney issues on Décor that will be offsets to that. We've got good merchandising plans set on Rubbermaid Consumer. Remember, we were shutting down one of the big Rubbermaid Consumer factories and moving machinery from Texas to Kansas and Ohio in the second quarter. So we weren't really pressing that business very hard because you disrupt availability. And we've created capacity dynamic. And the service issue we wouldn't want to do. So we've got that transition, which in the factory landscape that we've executed in Q2 that's behind us so we have a little bit more flexibly on Rubbermaid Consumer in the second half of the year. And I would expect us to be able to deliver some more progress. So I mean, there's a lot of different moving parts in our numbers. And then we've got Baby momentum. So Baby is certainly stronger than a year ago in Q3, and we'll have to see about Q4 how that plays out. We don't buy by quarter, Jason, as you know, but I think that we should -- you should think about what we said with respect to our full year guidance along those 4 -- along the 4 different metrics that we guide on. And hopefully, we can do a little bit better on some of them. But at this point, I think that's a good reference point.

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

Yes, so with Project Renewal is the first step in simplifying our structures, and we're seeing the benefits of that beginning to flow through. We did some important things that were tough for the organization in Q4 and into Q1 of 2013 on the GBU architecture and group design. And those are largely done and behind us. We then shifted our focus in Q2 to the manufacturing and distribution center component of Project Renewal. And we've done the factory closure, which obviously, was quite traumatic in Texas for people. And we've moved the equipment now and are starting up that equipment in Kansas and in Ohio, in those factories. And that's been exciting and disruptive but positive. And so we're focused on the manufacturing distribution center side of things. And then we've got some more to do to close off Renewal in the back half of the year and into next year to put a punctuation point on that. That's Project Renewal. When we talk to you about One Newell initiatives, that's above and beyond Project Renewal. And what that's about is about improving the indirect procurement costs in our business and getting on with the working capital opportunities. And that is nothing to do with restructuring. That has to do with really tightening down on how we spend our money. One piece of that is the indirect procurement partnership that we formed with IBM to access their $50 billion buying pool, and that's focused on U.S. indirect procurement, which if you recall, is $1.2 billion of spend. And that's where we said we would expect to get $50 million of savings by 2013. We're making great progress there. I'm really happy with the work and the team that's leading it and the energy that it's created within the total organization. And the working capital opportunity that Juan talked about at Analyst Day, we're just beginning to get into. I'm pleased with our inventory management in the first half of the year. It's down $70 million versus prior year, and that's because we're focused on it, and part of our incentive schemes are focused on quarterly delivery of improvements. And so we're really kind of wiring that one down, and we're making some good progress on payables. As we exit Q2 into Q3, Q4, we'll make some good progress on payables as we put some new programs in place there. And so all those things are playing out. And we have a lot more work to do in both areas, so I don't want to -- I think it's premature to suggest that we're anywhere near. Just kind of making it down, in a 100-yard sprint, we're sort of in the 20-yard line on indirect procurement, probably on the 10-yard line on the working capital. But that's fallen out and it's -- I think the organization sees the opportunity and smells it. We're all on the same incentive schemes, so that we have skin in the game on the outcome, everyone of us. And so we're all pulling the oars in the same direction to make it happen.

Your final question will come from the line of Bill Schmitz with Deutsche Bank.

My follow-up is already answered.

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

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

Today's call will be available on the web at newellrubbermaid.com and on digital replay at (855) 859-2056 or (404) 537-3406 with an access code of 10707444, starting 2 hours following the end of today's call. This concludes our conference. You may now disconnect.