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Executives

Michael B. Polk - Chief Executive Officer, President and Director

Newell Rubbermaid Inc. (NWL) Consumer Analyst Group of New York (CAGNY) Conference February 21, 2013 3:00 PM ET

Unknown Analyst

[Audio Gap]

and especially for sponsoring our 2:45 break just now. Thank you. On the dais today is Mike Polk, CEO; Doug Martin, CFO; and Nancy O'Donnell, VP of Investor Relations. Mike Polk joined Newell 18 months ago and since his arrival, he has restructured the company into 6 business units; announced a restructuring plan to capture $300 million in savings; strengthened the management team; and implemented the growth game plan to accelerate top line growth.

Here to tell you more about his plans at Newell is Mike Polk.

Michael B. Polk

Thanks, Rob. Good afternoon, everyone. Nancy, Doug and I are thrilled to be here today on behalf of all the colleagues that we represent from Newell Rubbermaid.

We've got 3 objectives for today. First is to share our perspective on the potential of the business as defined by the growth game plan, which is our blueprint for growth going forward; second, update you in the progress in driving the growth game plan into action; and third, discuss how that transformation has impacted our 2012 results and how we see 2013 playing out as we move forward.

Before we get going, the mandatory forwarding-looking disclaimer. With that done, let's sort of dive in.

For those of you that don't know us, we're a $6 billion company, branded goods businesses organized into 6 segments: Commercial Products, Tools, Writing, Home Solutions, Babies -- Baby and Specialty. Our top 14 brands represent 85% of our revenue. And while we generate the vast majority of our revenue in the developed markets, we have operations in nearly 100 markets around the world. And our fastest growing geographies are in the emerging markets where 15% percent of our revenue is growing roughly at 12%.

Now 18 months or so into my new role, I'm incredibly excited about the opportunities about what we are on the verge of unlocking at Newell Rubbermaid. And the reality is that opportunity is bigger than what I thought it was going to be when I originally started. We're convinced that our new corporate strategy that makes sharper choices for the future and releases significant cost to be reinvested to brands and capabilities will result in accelerated growth and compelling returns to shareholders.

We have leading brands that are almost always #1 or #2 in their home markets. And even better, the top 2 brands in these categories when looked at globally typically only represent 20% to 35% of the total category global share. Our markets do not have the strength of competition or the level of market share consolidation that you would find from nearly anybody else presenting at this conference this week. And many of our competitors don't play a true brand model, and this creates a compelling opportunity for us and our leading brands and sets us apart in the eyes of our customers. So leading brands with plenty of room for growth.

Beyond our brands, we have lived through a period of slow to no growth in the majority of our markets. And while I don't think 2013 will be a materially different year than 2012, over time we'd expect our markets to rebound with the eventual macro turn in the developed world contributing to a significant cyclical turn that creates plenty of room for growth for our markets. And with that tailwind behind our categories, we should see enhanced underlying growth.

This chart represents housing starts, which for about 1/3 of our portfolio is a relevant indicator. And as you can see, while there's a lot of news out there about the movement forward relative to recent history, it's sort of a bounce off the bottom. And so plenty of headroom in our markets for accelerated growth going forward.

Of course, our performance has plenty of headroom still, despite steady, consistent improvement in EPS over the last number of years. We have a clear line of sight with the program we have in place to deliver EPS growth in the 2013 full year guidance range of $1.78 to $1.84 with accelerating results as defined by the growth game plan in the years beyond. So good progress, but performance with plenty of room for growth.

We believe the investment thesis in Newell is strong. First, we have a clear and decisive corporate strategy, the growth game plan that drives virtually every choice we're making. Second, we have available cost savings that give us a line of sight to earnings and increased investment for the next number of years. The savings programs we've announced are worth cumulatively up to $0.60 a share, and this gives us a level of confidence in attractive returns and significantly derisks the transformation we're playing for. Third, we've made sharper portfolio choices and are investing in strength and capabilities with new experienced leadership, which when coupled with the increased investment, will yield accelerated growth and results. And finally, with our balance sheet reflecting a much improved capital structure and with our strong growth -- strong and growing free cash flow, we've got flexibility to both strengthen returns to shareholders and complement our expected acceleration and underlying performance with bolt-on M&A.

So the totality of these 4 observations is the promise of the growth game plan and explains our building excitement about the possibilities for our company. Of course, it's early, it's very early days still and there's a lot still to do. And as we've communicated at last year's CAGNY Conference, the growth game plan will be delivered in 3 stages.

First, the delivery stage, where we'll return our business to a consistent cadence of doing what we say we're going to do. Second, the strategic stage, where we'll reshape the business for the future through sharper portfolio choices and aggressive stance on costs and the strengthened capabilities agenda to unlock the upside in our brands and our categories. And finally, the acceleration stage where we'll see the acceleration of growth in results as a result of the efforts in the previous strategic phase.

2013 is the transition year between the first 2 stages and it's going to be a year of tremendous change as we pivot the company to drive the growth game plan into action. The vast majority of our growth through the growth game plan period to 2017 is generated through a combination of market share, increases in our home markets and deployment of our portfolio into the faster-growing emerging markets. 70% of our growth over that cumulative period will be driven via those avenues, market share growth at home and deployment of our portfolio to emerging markets, with the balance being driven by market growth.

We intend to achieve this outcome while simultaneously expanding our margins globally. So for this to occur, we've got to change our financial algorithm. Driving margins up substantially in the developed world to fund investment for share increases in North America and to fund investments in the select group of businesses for deployment into the faster-growing emerging markets, accepting the likely reduction in operating income margins in the emerging markets as we scale our positions in those geographies. One of the key tenets of the growth game plan is to also be much more choiceful in the categories which we invest behind, placing our bets on the categories that have the greatest right to win.

The period in our history when we would be more democratic in the way we allocate resources, both human and financial, is behind us. And with the announcement of our new operating model in November, as part of the expansion of Project Renewal, we're now moving quickly to realign both people and money to the growth priorities. Our growth game plan, Where to Play choices, establish businesses as either growth businesses, call these Win Bigger businesses, or business that will grow but must also fuel the Win Bigger choices. We call these Win Where We Are and Incubate For Growth businesses. Our portfolio essentially breaks down against these 2 very different roles.

Our top 3 priorities in rank order are: Commercial Products, Tools and Writing. These segments together represent 51% of our revenue and grew core sales in 2012 at 4.3%. These businesses also have operating income margins significantly above the balance of our portfolio. But perhaps most importantly, these businesses compete in big, global categories, have plenty of share headroom in their home markets and have opportunity to leverage the trend tailwinds in the world associated with the infrastructure build-out and increasing demand for access to education in the emerging markets. Our brands in these categories are strongly positioned and will be granted the first call on resources as we realign support to these segments.

The balance of our portfolio must also grow, but fuel the investment in our priorities categories at the same time. This means they must operate differently than they have in the recent past with far lower structural cost. As recently as 2011, these 3 segments were managed at 9 autonomous global business units, most of them with their own standalone sales force. Today, they're moving towards 3 fully integrated segments that leverage one Newell customer development organization.

Over time, these choices will result in the reshaping of Newell's portfolio with 4 strong priority segments: Commercial Products, Tools, Writing and Home Solutions, with each -- each with a potential, with M&A, of someday being $1.5 billion to $2 billion pillars in an $8 billion to $9 billion business.

The key to success in the short-term will be in part determined by replicating the 2012 success of Baby in the other Win Where We Are and the Incubate businesses. Baby in 2012 grew core sales 9.8% and increased operating income 40% without a significant increase in SG&A support. This is what we mean by grow and fuel. So driving our portfolio choices into action is a key element of our roadmap for accelerated performance.

Beyond portfolio choices, our 5 Ways to Win shape our activities and focus our platforms to get us the growth outcomes we're looking for and match the portfolio choices we've made. There are a few big things that can make a real difference. We will make our brands really matter, we'll build an executional powerhouse, we'll unlock the trapped capacity for growth, we'll to develop a team for growth and we'll extend our borders.

In November, we took the choice to organize the company around the first 2 pillars of the growth game plan. The first, making our brands really matter. It's all about brand and category development. This is where marketing, R&D, design and corporate development occur in our company. The second, building an executional powerhouse, is where customer development, our newly formed global supply chain and our segments are based. These 2 organizational pillars, development and delivery, are the 2 core activity systems in the company and are the keys to the new operating model announced in November of last year as part of the extension of Project Renewal.

By building an organization with these 2 interdependent but equal capabilities, one focused on building the ideas or development and the other focused on creating commercial value from those ideas, delivery, will create a stronger growth model, one less dependent on the capability that has sustained us over the last number of years, our delivery organization. We believe by creating a more focused capability on development, the urgent will less frequently overwhelm the strategic and we will increase the number of big hit innovations and big brand ideas. Big brand ideas like Irwin's National Tradesmen Day, which will extend outside the United States in 2013 to Brazil and Colombia. Big brand ideas like Sharpie's extension of its self-expression campaign to music with a Q4 program to kick off One Direction's national tour in the U.S. or the celebration of Parker's 125th anniversary in 2013, a campaign we launched 3 weeks ago in Shanghai. And big hit innovations like Paper Mate InkJoy, where we're coming with a whole new line of InkJoy offerings in 2013. And the new Executive Series from Rubbermaid Commercial Products, a higher-end set of offerings for 5-star hotels. And last but not least, the launch into the HVAC and refrigeration category with our third professional tool brand in North America, Hilmor. These are the types of initiatives you can expect from our new operating model with the frequency and impact of these ideas increasing as we move through 2013 into 2014 and beyond.

But rather than me convey how big a change this is for us, let me let our employees tell you how these change feel within Newell. I'll show you 2 videos that we used last week at our recent leadership forum. The first on Sharpie music and the second relating to the launch of Hilmor.

Mark, can you please run the videos?

[Presentation]

Michael B. Polk

So, of course, growth initiatives like this cost money. And our third way to win is all about releasing that trapped capacity for growth that's tied up in our business today. In November, we announced 5 new work streams on cost as part of the expansion of Project Renewal. First being organization simplification, the sec being -- second being best cost finance, third being EMEA transformation, fourth, best cost back office and the fifth, the release of cost connected to our new global supply chain. With the first phase of Project Renewal nearly complete and significant actions taken on organization simplification and best cost finance in the first half of 2013, the next big tranche of savings will be generated in EMEA. And while no final decisions have been taken yet, we'll do so in the near future and expect to begin the next phase of transformation in our European business in the second half of this year.

The EMEA opportunity is all about complexity reduction. From every angle, we've overextended our business into a fragmented European footprint, whether we look by geography, by customer, by product or by proposition. There's an opportunity cost to leaving these resources trapped in EMEA in this way. After now nearly 5 to 6 years of poor market conditions and continued negative outlook through the second phase of renewal, we have opportunity to transfer these resources to a select set of high potential EMEA sales that can grow to North America, where we're proving we can grow well ahead of our markets, or to fund the build-out of our emerging markets' Win Bigger categories. We'll announce major initiatives to clean up our footprint and consequently release substantial savings over the near future once final decisions are taken.

When you piece this together for 2013, you see the extent of the savings around $100 million and around $0.25 of EPS visibility that can either allow us to deliver robust earnings growth and/or fuel our big brand growth agenda.

To transform a company requires talent in organization development. Leadership is critical and this led me to reshape my executive team fundamentally in late 2012.

The first 2 pillars, development and delivery, are now led by Mark Tarchetti and Bill Burke, 2 very capable and decisive leaders, one new to the organization and one with 10 years' experience within Newell. Mark worked as a consultant with us before agreeing to join and shape the growth game plan with me and my team. Prior to that, he was the Head of Global Corporate Strategy at Unilever. Bill is a tremendous leader and has delivered many years of outstanding growth, most recently leading the Professional group. Bill and Mark's teams are organized around 6 business segments and 4 defining capabilities: marketing, design and R&D, supply chain and customer development. We've hired 4 new leaders, all seasoned veterans who've built functions before. These appointments have upgraded our talent pool and opened a whole new set of possibilities for us. They all sit on my leadership team and I'm delighted with the bench strength we've assembled. The strongest sign of confidence I can think of in our potential is how many big, proven leaders are prepared to join and sign up to the opportunity defined in the growth game plan.

Alongside the capability development these leaders will bring, we are significantly strengthening our talent and performance management program. We're simplifying management layers and strengthening individual accountability for results and KPIs. We will connect more explicitly individual rewards with these KPIs as a result to transform the linkages between strategy, structure, individual contribution and compensation.

Finally, the fifth element of the growth game plan, extending beyond our borders. This is the discontinuity in our growth algorithm over the next 5 years. Our brands can travel and we need to go where the growth in the world is.

We're already well advanced in Latin America, driving 3 of our big priorities: Commercial Products, Tools and Writing. We're sustaining attractive growth rates and can sustain this for many years to come, as we scale our brands and adapt our portfolio and pricing to local markets.

After Latin America comes China and then Southeast Asia. We're already starting, but we have much more to do there. My team and I were in Shanghai about a month ago celebrating the 125th anniversary of Parker, a brand whose success in China shows how Chinese consumers will welcome our portfolio and our brands. And we've just opened a new larger office in Shanghai for over 250 people in December of 2012, consolidating all of our China businesses to 1 location and we -- as we continuously build out our presence, our organizations and our insights to develop new businesses.

We'll follow these growth plans and benefit from the international experience of my new leadership team and through that experience, we'll change the growth momentum in our business. Over the next 10 years, we can move from around 2% core sales growth momentum to over 5% if we place our bets decisively on extending our footprint, we get a positive geographic mix effect on our growth rates.

So a lot of opportunity and a decisive strategy to pursue that opportunity. Transformation on the scale pays off, but it doesn't come overnight and this is why I've outlined 3 phases of performance.

We're moving into the strategic phase with 2013, the transition year, and have a line of sight to a much more significant performance in the years to come. 2012 was a year of sequential improvement, steady core sales growth, consistently delivered through the quarters; solid earnings growth, despite many obstacles to clear; strong cash flow growth, consistent with the cash-generative nature of our business; and a strong year of a driving return to shareholders, both through the share repurchases that we did and the step-change in our dividend payout ratio to the high end of our 30% to 35% payout range.

When you look at the core of our business, our largest brands, our largest segments, our largest markets, our core sales growth is quite strong. This is why the growth game plan makes sharp portfolio choices and why it's critical to stabilize and clean up the balance of our portfolio in EMEA and elsewhere, to let the strength of our core -- the core of our business shine through.

As I've said today and on our Q4 earnings call, 2013 is a transition year. Performance will accelerate as our leadership and organization changes bed down and as we unlock the savings associated with the next phase of Project Renewal. The flow of savings and reinvestment give us a back-half-weighted plan. Our full year 2013 guidance assumes no help from the external market and as a result, we see -- as we can see from the recent announcements from some of our retail partners, they see the world no differently than we do. The top first half of the year environment, for sure in the U.S. and in Europe and, hopefully, some moderation in the back half.

Additionally, we have a set of phasing issues in Q1, which will impact our flow of results through the first half with a weak Q1 versus prior year and a stronger Q2 as the year-ago Q1 items reverse out in Q2. So challenges in the macro continue in 2013, quarterly phasing issues connected to year-ago events exist, but our confidence is filled to the brim in the long-term potential of our business and in our full year delivery, derisked by $100 million of savings, which is $0.25 of earnings if those savings were all allowed to flow through to the bottom line.

In this context, we've reaffirmed our full year guidance for 2013. As you understand the long-term opportunity for Newell, I'd be remiss if I didn't remind you of the overall resources we have to access our upside potential. We have a line of sight to uncommitted cash of $1.5 billion in the next few years after financing CapEx, increasing dividends and executing the authorized $300 million share buyback. This uncommitted cash, when coupled with increased borrowing capacity of anywhere from $700 million to $800 million, depending on the analysis you look at, by 2017, gives us about $2.3 billion of firepower to activate the agenda or to accelerate returns to shareholders. In today's share price, that's roughly equivalent to about 1/3 of our market cap.

So with that, let me close by saying our confidence is building every day. That confidence is driven by the knowledge that we have a clear corporate strategy; a strong, seasoned leadership team in place; major inflow of funds for investment or for earnings; a disciplined in strategic approach to resource allocation; and an organization with a great capacity to drive change, but also to absorb change. So with that, let me open up the floor to questions.

Question-and-Answer Session

Michael B. Polk

Connie [ph]?

Unknown Analyst

Are the changes you're thinking of making in EMEA and the announcements you're going to make about that, are they -- are the cost and savings of those changes already included in the guidance you've already given, or will they represent incremental savings?

Michael B. Polk

No, those are captured as part of the second phase of renewals, the third activity stream of the 5 that I articulated with the specifics to be announced.

Michael B. Polk

Other questions? Is that Bill?

Unknown Analyst

Mike, I know we talked about it a little bit, but can you talk about the OfficeMax and Office Depot merger? I know it's a very small percentage of your sales, but looking at your guidance for the year, would the deal close and, say, maybe within the year impact anything, do you think?

Michael B. Polk

Well, look, it's -- if I look at the total business as -- the combined businesses as a percentage of our total revenue globally, it's about 3%, of our total revenue, roughly. These folks are both strategic partners of ours so they're important to us and that relationship will sustain irrespective of what structure gets wrapped around the 2 companies. So I don't strategically think there is an issue here. I think this is an opportunity for us to kind of focus our energy around our key partners and we will continue to do that with the combined entity and with all of our other partners, either in the office channel or in the adjacent channels. There's likely to be some disruption in the business after the deal closes, I would imagine. If I were in their shoes, I was going to -- we'd have to be pursuing the synergies that they've committed to, and I'm sure part of that will come through optimization of their distribution warehouse networks and so that will cause some rebalancing of inventories. But that's not a strategic issue for us, that is an issue in the moment whenever that happens and we'll have to deal with it. But I don't get -- I don't -- I'm not strategically concerned about it at all and I think it's probably the right choice for the 2 folks we're talking about in the context of their competitive frame. So that is a nonissue from my perspective. It just means a different set of relationships, probably, for us to develop and build as we look to strengthen our customer development interfaces from transactional relationships to more strategic relationships. So whenever the deal closes, I'm sure we've got a moment in time where we'll have some difficulty where they'll be rebalancing inventors across the network if they're looking to optimize and we'll have just to deal with it. I mean, that's just normal noise in the system in any consumer goods or branded company, you're going to deal with this. We had to deal with it in Canada last year with Zellers. We'll deal with it with OfficeMax and Office Depot this year. And I'm sure retail consolidation will continue to happen in the industry.

Unknown Analyst

Got you. Is there any update on J.C. Penney? I think Judgment Day in terms of housewares and Décor is coming soon, right?

Michael B. Polk

The clock is ticking. This is great. So, no. We're looking forward to getting to the moment where they convert their stores. There was some noise out there in recent months about them slowing down, that was not related to the home category. So that's good news for us, and we're looking forward to getting through that moment, both on our Culinary business where we -- while we haven't taken steps back on Culinary, we haven't had the opportunity we hoped we would have had in '12 on that business once we converted JCP in August of 2011 to taking Calphalon on. But now we see, as we come down to this transition window, an opportunity there. And then on Décor, of course, which is the bigger business with JCP, we're very much looking forward to the moment that they start those conversions, which are set up for, as best we can tell, April into May. That'll be a bit of a challenge for us in Q1, which contributes to some of the lumpiness in our first half performance, where they'll stop ordering in the month of March as they reset those stores in -- for April, May, the relaunch. So that's on track as best we can tell, and we look forward to getting that behind us.

Unknown Analyst

My question has to do with your visibility, if you will, or management of the business because you talk a lot about having flexibility to shift gears or spend less or spend more. But if I look at what happened in 2012, your earnings growth came in higher than the target range for the delivery phase and yet your sales growth was at the low end. And I guess, not looking back too much, but do you think had you not let as much earnings drop to the bottom line and you reinvested, your sales growth would've been stronger? I mean, is there that much of a trade off from a marketing or an investment perspective?

Michael B. Polk

Yes. I felt we had the right balance, Wendy [ph], in the end, especially if you strip out Décor. So if you look at our -- I'll just focus on our U.S. business for a moment. Our underlying growth in the U.S. was 2.3% in 2012. If we hadn't had the events on Décor, it would've been 4% core sales growth in 2012 in the U.S. So putting more money behind businesses that were already growing 3%, 4%, 5% in a really sort of cool market environment, was not a good idea in my mind, because I didn't wanted to create a competitive escalation. Now we could have put that money into further brand support in Latin America, but I just didn't feel like we were ready yet. We put money into feet on the street in Latin America last year, but the brand work is just gearing up now. And I didn't want to put good money after -- against assets that weren't really ready to go. So it's a choice and I'm actively involved in those choices. Doug, myself, Mark and Bill will make those resource management calls. And we aired on the side of protecting EPS in an uncertain environment, recognizing that the core of our core, which is what I tried to show with those 3 bubbles, was actually pretty healthy. If it weren't for Décor, we would have had a really pretty strong year last year.

Unknown Analyst

And the timing of some of those decisions, I know you've talked in the past that you're international business might actually be over-earning and margins might have to come down there for some period of time. But the fact that you are also generating savings, I guess, compared to where you were a year ago maybe, are you more confident, if you will, that the magnitude of the margin compression is going to be large or can you frame that? How much pressure should we see...

Michael B. Polk

But we've already started to see some of that compression occur. You see it -- you can't see it in geographic breaks because we don't cut the data that way. But you would see it if you look at Tools segment and Commercial Product segment operating income margin 2012 versus 2011. You would've seen those 2 segments step back while Writing remained quite strong, and that's the sales investment. So you are seeing that contraction occur. What's going to happen with Renewal to savings, which are in the first half of the year, is almost all of those savings are developed world savings that flow through to the P&L starting in Q2 and they'll be available to be dispersed into brand support programs in the second of the year largely, although some will flow in Q2. And that will be more selective. There won't be an exclusive emerging markets approach because, as I've said, we have a select group of sales, country category sales in Europe that are interesting, that we can grow and we can grow profitably. And we have a many sales like that in North America. And our growth algorithm is dependent on 2 outcomes: market shift -- continued market share growth in North America and then the geographic deployment of our portfolio into the faster-growing emerging markets in our Win Bigger categories. And we'll sequence the money in, not through a geographic lens, but again specific activities depending on the readiness of those activities.

Bill [ph]?

Unknown Analyst

Just following up on kind of Europe, and I know you're going to get more color on the plan, but when -- it sounds like there's going to be some shrinking of the footprint. And can you help us understand how you're looking at that as -- is the company just not big enough to kind of wait it out in Europe for the overall economy to improve and the environment to improve rather than just redeploy those resources? Or have you looked at it and said, "Hey, there are just some areas we're never going to -- it's never going to make sense to be there so let's just move on." I mean, I'm trying to understand, are you moving out of the bottom when you -- if you waited a couple of years, hey, you're going to have to be redeploying right back into those markets.

Michael B. Polk

I don't think waiting will help. So let me give you some facts. We sell into 450 country categories sale combinations in EMEA. The top 50 represent 78% of our total revenue in EMEA. So the bottom 400 represent 22% of our revenue. We have 12,000 customers that we call on in EMEA. We have 17,000 SKUs in EMEA. And so the complexity cost, you can imagine the infrastructure that's built around and up to support a footprint like that. So we do believe that the core of our core European business, as I said, the top 50 sales represent 78% of the revenue can grow, but when the resources get disaggregated and fragmented that badly, you don't have resources to invest in advertising and promotion in the sales that matter. And so we've got to fix that. And if that means we have to step back to step forward, no problem in my book. And we believe we will significantly improve profitability at the same time as doing that for the company in total. So there's more to come. We haven't taken any final decisions, but we've really interrogated our business in Europe over the last 6 to 9 months and we're closing in on a set of recommendations that will get this thing shorted and get Europe back to growth, even if it requires us to step back to step forward.

Connie [ph]?

Unknown Analyst

I just want to make sure I understood what you said on one of your slides. It was one that said you'll have a more focused portfolio over time. It was on Page 8. And I think you said about that slide that each one of these businesses had the potential to be $1 billion and $1.5 billion in sales with M&A in a $9 billion to -- $8 billion to $9 billion company, right? I think that's what you said. Okay.

Michael B. Polk

That's what I said, yes. $1.5 billion to $2 billion is what I said.

Unknown Analyst

Okay. So your sales phase right now is $6 billion?

Michael B. Polk

Correct.

Unknown Analyst

That's a 50% increase to the upper end. So the question is, what's the time frame? Does the 3% to 5% core sales growth get you there? How much are acquisitions built in? And then just one last one, and -- you're Writing business is $1.4 billion, but Tools and Commercial Products are around $800 million each. Is the assumption here that you have a line on -- of sight into those commercial businesses that they would double?

Michael B. Polk

Right. So what I didn't say was a time frame because, of course, that would imply guidance, and I'm not providing that guidance here today. I also didn't say we would get there organically, but I did have a little bar underneath those 4 pillars, where I do think complementary M&A could support that outcome and would be necessary to achieve that outcome over any viable time frame. For example, 5 years, there is no way you'd get there without M&A. And I'm not suggesting 5 years is the right time frame, it may take 10, quite frankly, to do this in a way that is smart and balances use of cash versus returning value to shareholders. And so the path is clearly a complementary path of organic, underlying performance improvement, complemented by M&A with a fairly aggressive, I think, ability to provide a return to shareholders as we go so that your confidence in the choices we're making and the returns you'll ultimately get will be validated as we go. It's not something that you have to count on getting your return sometime in the distant future. So I'm clearly aware of the odds that we'll create out there, given our tremendous history of M&A as a company and the track record. But you're either going to have faith in us, in the leadership team, that we know what we're doing and we know how to do it or you're not. And I think you'll -- we'll continue to try to earn that faith. But we're going to take a long view with respect to what we're trying to build in this company and given the fact that we'll end up, over the next 5 years with $2.3 billion of uncommitted cash, certainly, some of that cash will go to bolt-on M&A and -- but, Connie [ph], I'm not going to -- I didn't pick a time frame specifically because I don't want to back into a guidance discussion and -- but I certainly think a $8 billion to $9 billion company is within line of sight, within my lifetime as a CEO. And but it's going to take a bit of all -- pulling all levers to make that happen. The strategic intent is to focus on those 4 core pillars, though, and that's why that chart is important. Commercial Products is our first priority, Tools is our second, Writing is our third. And Home Solutions is a big anchor category, which is $1.7 billion today, not necessarily the most coherent component of our portfolio and one that might need some work to bring coherence to it, but clearly, an anchor category for us and one that will serve as a source of funds for the doubling down on the other 3 categories.

Yes, Lauren [ph]?

Unknown Analyst

Could you talk a little bit more about Hilmor? Is it going to be -- is it retail or direct-to-trade or both, sort of a distribution build-out, competitive set? I don't know much about the HVAC category. And then also there are other...

Michael B. Polk

Don't worry. I'm surprised.

Unknown Analyst

A lot of time in crawlspaces. That's the part that lost me. But then also if there are other long-term projects, because had you mentioned, I think, in the video that this under works since 2008. So if there are other things like this, don't tell us what they are, but that are under development that we could think about coming in the next few years.

Michael B. Polk

Yes, this is a very important one. And if you were talking with the train guys or anybody that's in the commercial HVAC business, they'll tell you that the future of their companies are in the emerging markets. I was in Shanghai, we went into a consumer's home in Shanghai a lower-income home, I wanted to actually explore the Writing category but I walked out and looked up the wall of this apartment building and it was poor household, there were no lights in the hallways, it's pretty grim existence. But every window had an air conditioner in it. And so this is a huge opportunity globally as people move from rural living to urban living and apartment dwelling and HVAC systems need to get built into the buildings themselves or every apartment has an air conditioner. So this is a very important market. Why was it -- why is it attractive to us? It's attractive to us, particularly in the U.S. at this point, because it is a wide-open IP space. There's very little intellectual property rights that anybody owns. And so when we market-mapped the potential adjacent categories to move into, it had to clear 2 filters for me. One was we could own the IP and therefore, command a product -- design a set of product offerings that were ownable, insulatable, proprietary. And a good portion of the 150 tools that we're launching are proprietary. The other thing that had to happen was this had to be a category that could travel over time. And obviously, I described you the Shanghai apartment complex that I was in. So if you went to São Paulo, if you were in Bogotá, you're in any Latin countries or if you're in South Asia and looking at the way people live there, in many of the apartment buildings, you'd see the same thing. And so it filled -- it cleared both hurdles. The competitive set is very, very disaggregated. There's no organized competition, so the biggest competitive brand is a brand called Yellow Jacket. And so we have -- we feel like we've got a free run at this. Now is this the biggest category you can enter? No. Best the use of common sales force, and we have sale force scale and leverage, yes. It leverages Lenox's sales force. It's the same distribution channel. There's an overlap between plumbing and HVAC distributorships, et cetera. So there's some nice synergies in selling. But the long-term play is clearly bigger than the United States, we're using the U.S. as the place we want to build our repeatable model and the ambition would be to extend the concept, the Hilmor concept more broadly around the world, probably with a different set of product offerings. Now, a credit to Mark Ketchum and the team for initiating this work. This clearly started well before I showed up. But was on the shelf and it was clearly one of those ones that we had the flexibility to pull off and really reengage on. And that was a choice we made as we understood the category in more detail last year. And the team that you saw in the video, highly motivated team of leaders that have driven this thing to market, and we'll see how big it can be. I think we'll surprise ourselves and many others with respect to the opportunity here. The level of -- and we launched it in Dallas 3 weeks ago. The level of engagement at the HVAC trade show that were at was really pretty remarkable because they haven't seen anything new in product -- this product space in a long, long time. So a great opportunity for us. Like most of our categories, the competition is not intense and certainly, I don't think through a brand lens and we have the benefit of investing a number of years to build out proprietary points of difference having mapped the IP space really quite clearly. So we're excited about it. And there's more things like that and I've only talked about the ones that we've launched that are public. We've got new Sharpie ideas that are coming, we've got a big Tools initiative in Brazil in the middle of the year that we'll be happy to talk about at some point in the second quarter. But you should expect more of this from us and quite frankly, we're just starting. Richard and his team and Chuck and his team have just landed. So with the release of cost, when we talk about line of sight to $100 million, that's a ton of money for a company like us and it doesn't all need to flow to EPS, so it can flow back into the business to support some of these ideas that have yet -- have not been nurtured properly. And that's the opportunity, that's what the -- you have to decide where do you want to subscribe to when you're looking at us as a potential investment.

Lee [ph]?

Unknown Analyst

Could you talk about your business in the context of e-commerce or some of the issues at retail? And this is one that might be an opportunity and a risk for -- depending on how your retail customers manage it. How does it affect you in terms of your categories and your geographies?

Michael B. Polk

Look, I think this is huge opportunity for everybody involved, retailer and supplier. So the question is how you manage it. And we've had a very good run, as you know, from our conversations at the Analyst Day, about 9% of our revenue globally is e-based, either direct or indirect. And we continue to grow very, very rapidly in our e channels, whether it's in the Commercial Products end of the business or whether it's in our consumer businesses, every one of our business is growing well into double digits, whether it's at -- an e-tailer, that's an existing partner or whether it's a direct selling proposition for us like we have on some of our businesses like Parker and on Calphalon. So tremendous upside. Are we organized for success today? I'd say no. I spent the last few months with Mark and the team thinking about what the right structure is going forward. We have 3 different activities in this space that are important. The direct-to-consumer selling propositions that Calphalon and Parker want to engage on, I think those are long-term, probably small ideas today, maybe bigger ideas over time. The indirect relationships with the walmart.coms and that target.coms and the bru.coms, baby registry platform within Baby, those are all here and now, very important and critical that we get to our fair share of market in those channels. Because they're very no -- they have very low barriers to entry and so all these investment we've built up in these brands and in the selling infrastructure to establish a barrier to entry gets nulled in that format. So you have to have at least a share point above your fair share or you're going to get a share mix negative effect in the marketplace. So it's really important for us to sprint to get to more than fair share in the indirect relationships, and we're doing that. But there's more to do there. And then, of course, there is the Amazons of this world and the eBays of this world, which are also opportunities for us. And it's not an "or" to us, it's an "and," as long as you can manage the channel dynamics and the pricing dynamics that can sometimes emerge. And we are prepared to cut people off if that channel dynamics gets unmanageable. We did that on Calphalon, we cut off Amazon last year, and we have yet to start shipping because they weren't living by our map pricing agreements. And you have to be prepared to do that or you can get into major channel conflict. And so we're prepared to have those tough conversations because they're the right ones to have and they're in both parties' interest to stay disciplined.

Chris [ph]?

Unknown Analyst

I guess back to Décor and J.C. Penney, 2 things. I guess, first, why do you think you didn't recover more of the lost J.C. Penney's sales with other retailers or maybe you did and I just don't know about it, right? And then, how do you think about what we should think about for beyond May, right? I mean, are you going to just flatten out to a flat sort of level of growth there or do you think there's a chance to actually recover lost sales?

Michael B. Polk

I think it's a slow, steady recovery, and it's going to take a while to rebuild that business, for 2 reasons. One, it's a tough-margin business to begin with. So I'm not going to plow a lot of money into it to recapture that. We're going to build it back advisor by advisor. This is the custom portion of our portfolio that we're talking about here and that requires an intermediary between us and the consumer and we have to rebuild credibility with those advisors. And they're at Lowe's, and they're at Home Depot and they're at Bed Bath & Beyond. And so that's a person-by-person engagement and relationship discussion. We put a program out there called 14 Days or Free as an enabler to this and it's, by far, the most aggressive program, service-oriented program out there in the marketplace, and we're really happy with that. We haven't redeemed very many offers against that promise because we are serving customers with custom blinds in 14 days. So I don't know how much further I would go. I don't think going to 7 days would make a difference since 14 days is probably twice as strong as what anybody else would provide. So this is going to be a slow, steady recovery. I'm not going to put advertising dollars against Levolor as a way of turbocharging the recovery because I think those dollars would be better spent on Commercial Products, Tools or Writing before I put it against Levolor. So this is a steady recovery. This isn't going to be an overnight thing. And it doesn't cause me to lose much sleep. I just want to get past the period of time where the down elevators have been hurting so badly. Now with respect to recovering the business, there's 2 -- there were 2 potential options: one was Lowes; the other Home Depot; and then third, the independent channel. The independent channel is a very disaggregated channel. It's where Hunter Douglas plays. It's a tough market to go in and really without a huge amount of overhead in sales force, capture big share fast. And again, I wasn't prepared to do that. It's not -- it doesn't feature as high as the other strategic priorities we've got. So I wasn't going to go in and buy it, given the margin structure that exists in that business.

Eric [ph]?

Unknown Analyst

Can you discuss your priorities for free cash flow? And particularly what I'm wondering is why repurchases hasn't been a bigger allocation of free cash flow over the last couple of quarters here even if you look in your forward guidance over the next few years. And then also you mentioned the strong growth you've seen in the core business over the last couple of quarters here. Would you expect to make any divestitures or are there any brands you think you could divest over time?

Michael B. Polk

Yes. With respect to free cash and capital location, the #1 priority right now beyond CapEx or the underlying growth in the business is to fund the Renewal restructuring. And that's a draw on cash today, which, in that chart that I show, because it's a 5-year chart, because the payback is so fast it doesn't show up as a use because it comes back to you as a benefit. So that's the #1 priority over the next 18 months beyond CapEx. We chose dividend increase in the dividend, in getting the payout ratio to the high-end of our range, as the priority beyond the $300 million authorization that the Board had already granted us with respect to repurchases because we didn't believe we were competitive with our payout ratio and I wanted to make sure the stock was accessible to a broad class of investors to include growth in income funds, which when we started in July of '11, we really weren't in their consideration set because we're below most of their thresholds. So getting the restructuring funded, getting -- we did the authorization because the company was radically undervalued during the sovereign debt crisis in August, September of '11. We did right in that moment to stabilize things and I think that worked. But our strategic priority was to get the dividend up so that we broaden the class of investors that were interested in the business. Well, what we do next and what we do as we get further along through the balance of this year with respect to funding the restructuring, we come out of the big draws on restructuring dollars by the middle of next year. We get the savings flow of that all the way through 2015. But the big cash out the door to fund the restructuring really starts to wind down by the middle of next year. At that point, we end up really being pretty flush. And the question will be what do we decide to do with respect to capital allocation. And we have the payout ratios where we think they need to be. And of course, there's some that would argue it can go higher, but relative to our competitive set, we're now where we think we need to be and we'll keep it there at the high end of that range. So that leaves different types of alternatives. Either you use it for M&A to do bolt-ons or you pass it back in some other way to investors. Which by that time, we'll be coming to the end of our $300 million authorization, I would suspect, and we'll see what the Board decides to do. But clearly, it's a subject of conversation at every one of our Board meetings because we have a line of sight to that reality and the middle of '14, quite frankly, is like tomorrow to us when we're in that meeting. So that's something we need to resolve here pretty quickly. Your other question with respect to disposals. Look, I was very clear about what this company looks like over time. And I've said up until now that there's a $300 million chunk of business that would be better served in somebody else's, probably, portfolio, depending on the price. And the Baby business is strategically encumbered by what will inevitably be a very high cost of growth investment that would've to be made for that business to play for its full potential, which is all about China and building a baby gear market in China. And I continue to say that I wouldn't prioritize that ahead of Tools, Commercial Products or Writing as a priority for brand support and investment. Because the cost of building a market, baby gear market in China today is a $200 million market. The cost of making that $1 billion market is, with us doing the driving, is incredibly high. So we would probably have to mortgage a priority in the top 3, which we don't want to do because there's a much higher return likely to be generated off of Commercial Products, Tools and Writing, given their underlying margin structure and the size of the existing markets in those categories than there would be by placing a bet on Baby. So as tempted as I am with 9.8% core growth off to a rip-roaring start in 2013, 40% improvement in operating income margin with plenty of costs still to come out, as excited as I am about all of those opportunities and as aggressive as we're going to be to capture them, I still wouldn't rank it above those other choices given what's required to build a market in that category in a country like China. It would just be a disproportionate amount of advertising and brand support and it would disable at least one of the other priorities we have.

Yes?

Unknown Analyst

I just want to follow up on Wendy's [ph] question about the margins needing to go down internationally. And the way you described it was less about a structural problem in terms of saying, "Okay, we're over-earning in these markets," and more about the investment level required in order to get growth going forward. Is that the way we should look at it?

Michael B. Polk

Yes, I think that there are some examples where our gross margins and our pricing is too high in the categories, but that's not the vast majority of issue we face. The vast majority of issue we face is we don't have a business model in place, a selling system in place. So we're going to have to invest in SG&A today to scale the business. We should -- and we'll do our best to hold the gross margins as best we can in those geographies. There are some cases where we need to broaden the breadth of our portfolio into some higher volume adjacencies to get the brand scale, in which case we'll see some gross margin contraction. But there's not a one -- it's not one model. It's an opportunity-by-opportunity discussion with the vast majority investment really in selling system and then next in brand support. So that's not in gross margin, that's in SG&A. And we should profit from scale over time if we protect the gross margins.

Unknown Analyst

I think we're going to stop it there. Thank you very much to Newell for coming to CAGNY this year and presenting, and thank you for sponsoring the break.

Michael B. Polk

Sure.

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