Newell Rubbermaid, Inc. Q1 2010 Earnings Call Transcript

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 |  About: Newell Rubbermaid Inc. (NWL)
by: SA Transcripts

Operator

Welcome to the Newell Rubbermaid first quarter 2010 earnings conference call. At this time all participants are in a listen only mode. After a brief discussion by management, we will open up the call for questions. Just a reminder, today’s conference will be recorded. Today’s call is being webcast live at www.NewellRubbermaid.com on the investor relations home page under events and presentations.

A slide presentation is also available for download. A digital replay will be available two hours following the call at 888-203-1112 or 719-457-0820 for international callers. Please provide the conference code 2949893 to access the replay. I will now turn the call over to Nancy O’Donnell, Vice President of Investor Relations.

Nancy O’Donnell

Thank you for joining us to discuss Newell Rubbermaid’s 2010 first quarter results. With me today are Mr. Mark Ketchum, President and Chief Executive of the company and Juan Figuereo, Chief Financial Officer. Please note that during today’s call we will make reference to financial measures that are not GAAP measures. Reconciliation of these non-GAAP financial measures to GAAP financial results are included in today’s press release and are available on the investor’s section of the Newell Rubbermaid website.

I also want to remind you that our discussion today including the Q&A session will include forward-looking statements. Actual results may differ materially from expected results because of various risks and uncertainties, some of which are outside our control. These risks and uncertainties are described in our quarterly release and in our annual filings with the SEC. We further caution you that the company does not undertake and specifically disclaims any obligation to update any forward-looking statements that we make today.

With that, I’ll turn the call over to Mark.

Mark D. Ketchum

I am very pleased to share Newell Rubbermaid’s strong first quarter results with you. For the first time since the economic turmoil of 2008 began, the company once again delivered the growth trifecta, simultaneous sales growth, gross margin expansion and EPS growth. I must say, it feels good to be heading in that positive direction once again and I’m very excited about the prospects of our business going forward.

First quarter net sales growth came in at 8.5% and gross margin improved 100 basis points to 36.1%. Our operating margin improved to 11.2% of net sales. The combination of top line growth and higher gross margins helped drive normalized EPS of $0.25, a 25% increase over last year’s first quarter. Our company grew core sales over 7% in the first quarter after excluding the impact of foreign currency and the overhang affect of last year’s product line exits.

Tools, hardware and commercial products in the office product segments led the way with double digit sales growth. These are strong results. Although a portion of this sales increase represents pull forward of Q2 sales as some customers bought extra stock in advance of the April launch of our SAP conversion in our Rubbermaid commercial and Rubbermaid consumer businesses. We estimate between two and three percentage points of our total sales growth was due to SAP pre-buy.

Some of you have probably already noted that the sales trends in our operating segments this quarter were the inverse of last year’s declines with our tools, hardware and commercial products leading the pack followed by office products and then home and family. We believe there are two broad factors at play here, geographic trends that are specific to a few business units and customer dynamics.

Some of our markets outside of North America have come out of the recession earlier. This was particularly true in Latin America and some of our other emerging markets where we registered strong double digit sales increases. For example in Brazil tools, hardware and commercial sales grew over 40% for the quarter while the Parker brand globally grew over 20% driven by China and Russia.

The customer dynamic I referenced applies mostly to North America and other developed markets. Customers that cut their inventory the most over the past 18 months are now starting to restock in anticipation of increased consumer demand across the balance of the year. As a result, we believe another two to three points of our Q1 sales growth was the result of customer inventory restocking. Looking to the balance of the year, we’re not anticipating similar levels of restocking activity in subsequent quarters.

So, striking out the onetime impacts of SAP pre-buying and customer restocking, about two to three points of our core growth reflects increased consumer demand which is a little better than we had expected this early in the year. So, we are quiet encouraged by these results. This represents a critical inflection point in many of our categories from sales decline to sales growth and reinforces our belief that the trend will spread across our portfolio over the next quarter or two.

Confidence in our outlook for revenue growth this year is increasing. We’re convinced that the positive core sales trends are reflective of increasing consumer demand supported by our continued investments in new product innovations, branding and marketing. Across the portfolio we are winning with both customers and consumers. We are gaining new distribution, expanding shelf space and taking market share which will help drive sales growth in the balance of the year and beyond.

Let me take a moment to highlight a few examples of our first quarter success. Our industrial products and services businesses which goes to market under the Lenox brand, grew core sales in the high teens this quarter. While inventory restocking had an impact, a meaningful portion of the improvement was due to successful new product launches and key wins with customers.

For example, Lenox is benefitting from the introduction of its new Q88 by metal band saw blade designed specifically for Asian markets. This is one of the investments we made in the second half of 2009. With a patented design that maximizes blade life while still delivering superior cutting performance, the Q88 has helped Lenox achieve 80% end user conversion rates. This kind of conversion rate is best in class in this segment.

Our technology business also delivered higher teens core sales growth. A significant portion of that growth is attributable to restocking but we generated meaningful core sales growth improvement across all three of our key platforms and with Dymo labeling and Endicia Internet postage and most dramatically our Mimio interactive teaching technology business.

We continue to invest heavily in building sales and marketing capability at Mimio which impressively grew over 50% in the first quarter. We are also investing behind our core Dymo labeling business and we’re seeing the results of those efforts as well. As one example Dymo recently entered in to a partnership with 3M that will leverage 3M’s expansive selling organization to increase our sales and distribution within the high volume industrial labeling category.

We’re pleased with the progress of our fine writing business returning to solid growth this quarter after a very challenging 2009 where sales increases were fueled by strong results in China, Russia and the UK. Growth on our flagship Parker brand was over 20% anchored by the recent launch of four new products. We are also investing strategically to create dedicated Parker shop in a shop in key retailer locations and to enhance our in store merchandising and these investments are beginning to pay off. In China for example, we saw a 29% same store sales growth in our new shop in shops during the first quarter.

The everyday writing business also performed well this quarter with high single digit core sales growth. Perhaps you saw our television advertising during the winter Olympics promoting our new Papermate biodegradable, design metallic and gel pen lines. These ads were very successful. We gained several new retail listings during the quarter and saw a 10 point increase in point of sale in regions where the ads were shown versus regions with no ads. I’m excited with the evidence that innovation and marketing can grow our everyday writing business.

Lastly, our Rubbermaid consumer business performed well again this quarter with solid low single digit core sales growth even after excluding the impact of the SAP pre-buy. Our food storage business continues to introduce innovative new products. Most recently in March, Rubbermaid debuted it’s new premier line which has all of the previous features and benefits including stain and odor resistance and the popular easy-find lids but now it comes with the added appeal of BPA free plastic.

These examples give me comfort that our approach to innovation is creating products that are being embraced by consumers, improving our relationships with our customers and increasingly giving us the right to win in the marketplace. I am very pleased with the progress I am seeing across all of our business units. This is the fuel that will sustain the core sales growth trend that we started this quarter.

Gross margin was also a positive store for us in Q1. We delivered a healthy 100 basis point increase driven primarily by better product mix and strong productivity which more than offset higher input costs. Our restructuring efforts continue to deliver cost savings and our improved mix is further evidence in the progress we are making in driving effective innovation and new product development.

Some of you have expressed concerns about input cost inflations. I want to reiterate that in addition to our relentless focus on productivity, we are prepared to take pricing when necessary as we did affective mid April on our Rubbermaid consumer business and effective mid May on our Rubbermaid commercial business. Our exits from commoditized product lines and investments in differentiated products have bolstered our ability to do so.

Now, turning to our full year outlook; a while ago I told you that I was cautiously optimistic. I’m still cautious but I am now more optimistic so we are increasing our 2010 full year guidance. We are increasing our sales growth outlook to the range of low to mid single digits. We have several marketing initiatives and some exciting new product launches impacting the second half of the year and beginning late Q2 we will begin to reap the benefits of some recent distribution wins and shelf space gains.

Now, keep in mind we have yet to see a full scale rebound in our commercial, industrial or consumer end markets and developed markets continue to face record high unemployment levels. However, we believe that customer restocking and the specific strength we have seen in select categories and markets is a very positive sign. On the gross margin front we continue to expect to deliver 75 to 100 basis point improvement driven by the positive impact of improved product mix, product line exits, restructuring savings and increased productivity and beginning in the second quarter we’ll benefit from price increases, several of our businesses implemented to help offset the impact of higher year-over-year input costs.

Going forward we will continue to drive productivity initiatives to help neutralize any further inflation and will consider any additional pricing later this year if input costs increase is warranted. Turning now to our EPS outlook; we are taking our EPS guidance for the year up as well to a new range of $1.38 to $1.48. This incorporates the early resumption of growth already experienced in Q1 as well as the impact of the pre-buying on our expectations for Q2 sales. We will continue to reinvest across the portfolio and brand building activities such as R&D and [A&P] and the build out of our sales and marketing capabilities in key growth areas such as office technology and industrial products.

In summary, I think we are executing well against our strategy and I am excited about the growth prospects for our business. With that let me turn the call over to Juan to walk you through the financials in more detail.

Juan R. Figuereo

I’ll start with a review of the income statement on a normalized earnings basis. Net sales for the quarter were $1.3 billion up 8.5% compared to last year. Core sales, which excludes the impact of foreign currency and product line exits increased 7.2%. Favorable foreign currency contributed a positive 2.5% and the impact of the 2009 product line exits reduced sales by approximately 1.2%.

Our sales growth was particularly strong outside of North America where we grew 15.2% or 8.9% excluding currency impact. As Mark previously mentioned, our first quarter results include an estimated $30 to $35 million in sales related to pre-buying by certain customers in anticipation of the early April SAP go live at our Rubbermaid commercial products and Rubbermaid consumer business unit.

Gross margin we generated $472 million or 36.1% of sales, an increase of 100 basis points compared to the first quarter of 2009. The biggest contributors to this significant improvement were productivity gains resulting from a number of initiatives including project acceleration and favorable product mix across all three operating segments. These positive factors were more than enough to offset the impact of input cost inflation experienced during the quarter.

SG&A expenses were $326 million or 24.9% of net sales compared with $312 million or 25.9% of net sales last year. Currency accounted for $8 million of the year-over-year increase while SAP and other capability build investments accounted for the rest of the increase. Due to the facing of certain planned spanned shifting in to next quarter, our G&A spend was lower than anticipated this quarter.

Operating income excluding charges was $146 million or 11.2% of sales, a 200 basis point improvement versus last year. Interest expense during the quarter was $32 million a $1.4 million increase compared to the previous year reflecting higher interest rates partially offset by lower outstanding debt levels. As you may recall, we issued higher coupon debt at the end of the first quarter last year. Our continuing tax rate in the first quarter was 37.2% compared to 30.6% last year as a result of a couple of items discreet to the period including non-cash tax charges associated with divesting of equity based compensation and the rate of increase because of the expiration of certain US tax incentives including the R&D tax credit.

Although these items are not expected to significantly affect the continuing tax rate through the remainder of 2010, our full year tax rate is now more likely to approximate 31% to 32%. Our normalized EPS for the quarter came in at $0.25. This $0.25 excludes approximately $0.02 of GAAP dilution from the convertible notes which we issued in 2009. Please note that due to the call spread feature associated with these notes, the economic dilution is a little less than $0.01. We have included a schedule in our earnings call presentation located on our website that illustrates the methodology for calculating both the GAAP and the economic dilution from the convertible notes in and our associated hedge transactions.

Normalized EPS also excludes approximately $16 million or $0.04 per share in restructuring and related impairment charges associated with project acceleration. Restructuring charges included in the prior year quarter were $31 million or $0.08 per share. Turning to cash flow, we generated $29 million in operating cash flow during the quarter which compares to a use of $11 million in the first quarter last year. The primary drivers of this improvement were increased earnings and continued working capital management.

As you may have noticed accounts receivable normally a source of cash was the net use mainly due to the heavier than normal sales the last few weeks of the quarter as a result of SAP pre-buying. Conversely, our days in inventory were a little better than we anticipated due to higher than planned sales and continued improvement by our supply chain teams. Cap ex for the quarter was approximately $32 million.

Now, I’ll turn to our segment information. Home and family net sales were $557 million essentially flat to last year. Core sales in this segment decreased 1.5%. For ex contributed a positive 1.9% and the impact of last year’s product line exits reduced sales by 0.5%. Strong growth in our Rubbermaid consumer business was offset by softness in baby and parenting particularly in Asia and a first quarter decline in beauty and style related to the timing of a major customer category reset.

Home and family operating income was $69 million or 12.4% of sales, an increase of 160 basis points in operating margins as compared to last year. This improvement is attributed to productivity gains and the positive impact from product line exits. In our office product segment Q1 net sales were $352 million up 10.5% to last year with growth generated across all other business units. Core sales increased 13%. Product line exits reduced sales by 3.6% and currency had a favorable impact of 1.1%.

As a parenthetical note, some of you might recall that Mark has pointed to some of the office product business units as the recipient of focused strategic SG&A investment in the second half of 2009. As you may have noticed in Mark’s earlier remarks today those units recorded core sales growth in the high teens this quarter. Back to office products, operating income was $47 million, operating margin was 13.5%, a 370 basis point improvement compared to last year driven primarily by better leverage of structural SG&A as a result of increased sales and improved productivity.

Tools, hardware and commercial products net sales were up to $398 million a 21.3% improvement over last year once again with growth across all GBUs. Core sales increased 16.7% and favorable for ex increased sales by 4.6%. As you know, this is the most cyclical part of our business and we’re happy to report that most of their growth came outside of North America. Emerging economies are recovering faster which is why this segment’s faster growth was in places like Brazil and China. Tools, hardware and commercial products operating income was $52 million. Operating margin improved 140 basis points to 13% as the result of leveraging structural SG&A costs with increase in net sales.

Turning to the update of our full year 2010 outlook, we’re now projecting full year core sales growth in the low to mid single digit range. We anticipate a 1% to 2% decline from the impact of last year’s product line exit and at this point we projected a slightly negative impact from for ex. Please note that the first quarter results include and estimated $30 to $35 million in sales that were pulled forward from Q2 as the result of the SAP pre-buying and Rubbermaid consumer and Rubbermaid commercial products.

Gross margin is expected to expand by 75 to 100 basis points for the full year. We plan to more than offset the impact of expected input cost inflation through a combination of productivity, product mix and pricing. Margin expansion will be spread fairly evenly throughout the year although we do expect higher commodity pressure in the second quarter, we also have price increases going in to effect in that same quarter.

We will maintain SG&A spend for the full year at or below 25% of net sales. Substantially all of the year-over-year increase will be related to brand building and other revenue generating strategic SG&A. It is also important to note that we still expect $40 to $50 million of incremental spend to be incurred in the first half of this year. Interest expense for the year is expected to decline 5% to 8% as compared to 2009 as lower net debt levels of set higher interest rate in the balance of the year.

Our effective tax rate for the year is expected to be approximately 31% to 32%. As Mark indicated earlier, we are raising our outlook for normalized EPs to be between $1.38 and $1.48 per share. We anticipate 2010 pre-tax restructuring charges of between $60 to $80 million or $0.15 to $0.25 per share. Our normalized EPS outlook of $1.38 to $1.48 excludes these charges. Operating cash flow is projected to exceed 500 million after $70 to $100 million in restructuring cash payments for the year. Capital expenditures are expected to total between $160 and $170 million resulting in free cash flow well in excess of $300 million available to pay dividends and reduce outstanding debt.

In conclusion, we are very encouraged by the evidence we are seeing in the market place that our strategies are working with our customers and consumers. The trends we are seeing in our business make us feel a little bit more optimistic about our short term prospects and have helped to validate our decision to invest earlier behind certain key initiatives. We are focused on maintaining our growth momentum while continuing to execute against the strategies that will ensure long term sustainable top line growth, slow and steady progress expanding our margins and improve ability to leverage our SG&A investments.

This will keep us on a course towards increased profitability and increased cash flow generation. Our first quarter results represent good progress towards these goals and provide even more confidence that we are improving our ability to create value for our shareholders. With that, I’ll hand the call back over to Mark for his final comments.

Mark D. Ketchum

Before I close I want to remind you that you’ll hear more about our growth prospects, have an opportunity to meet our management team and explore first hand many of our new products at our upcoming analyst day which will be held May 26th at our global headquarters here in Atlanta. We’re working hard to put together a very productive day for you and we encourage your participation. I’m quite sure you’ll enjoy it.

I also want to thank my new Rubbermaid colleagues for all their hard work supporting the company’s strong first quarter results. It’s great to see the energy and enthusiasm that all of our employees are bring to the task of returning to growth. I am proud to lead this organization and I greatly appreciate your efforts. The year 2010 is off to a strong start with the return to top line growth, continued strong gross margin improvement and solid EPS results.

We’re encouraged by the start and we have increased confidence about our growth prospects for 2010 and beyond. I look forward to giving you more detail on our progress at analyst day. I’ll ask the operator at this point to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris Ferrara – Bank of America Merrill Lynch.

Chris Ferrara – Bank of America Merrill Lynch

Can you talk about gross margin leverage? I get that productivity and price mix really helped gross margin but with that massive top line this quarter can you try and put some numbers around how big fixed cost leverage is especially on a year-over-year change basis?

Juan R. Figuereo

The productivity that we refer to includes the top line growth leverage and there was significant productivity but there was also significant inflation and input costs in the quarter. The good news is that the combination of the productivity and the improved product mix completely offset the inflation but the inflation was significant.

Chris Ferrara – Bank of America Merrill Lynch

I guess going forward do you expect inflation to continue and you might be able to price on that but do you not expect the same level of productivity? I guess the same level of productivity wouldn’t be inherent in what your sales forecast is going forward is that right?

Juan R. Figuereo

We’re actually very bullish on productivity. I think we have a good track record of delivering productivity. As we look at the short term we’re actually looking at inflation even higher than this quarter in the very near term.

Mark D. Ketchum

Chris, I guess the other perspective I’d just remind you of is about half of our products are sourced and those sources are also prone to some inflation specifically, in the far east. The other half is the half that we have the leverage on to drive the productivity so we can leverage with higher volumes about half of what we sell.

Chris Ferrara – Bank of America Merrill Lynch

Just finally, Mark can you just give your thoughts on strategic SG&A in light of the fact that you are more optimistic, sales came in much better than expected this quarter. Has it changed your plans on how you’re going to spend strategically this year?

Mark D. Ketchum

No, I don’t think it has. What I would give you is the following, number one, we would expect to maintain our total SG&A spend at or below 25% of sales for the year. We expect to spend incrementally. It would probably amount to $50 to $75 million of incremental SG&A spend to match both that 25% threshold as well as the increase in sales for a year and that $50 to $75 million of that increased SG&A, the vast majority of that would be on brand building and other strategic investments.

Lastly, I’d tell you that it’s not different than what we would have told you at the beginning of the year. We continue to see good opportunities for investment and I cited a number of the examples in my remarks of how those investments are paying off, the effectiveness of our Papermate advertising, the effectiveness of our investment of better fixturing on our fine writing business, the investment in driving trial in our hand saw blades in Asia and so on.

Operator

Your next question comes from John Faucher – JP Morgan.

John Faucher – JP Morgan

Two questions, the first would be sort of I understand the need to take pricing in terms of looking at the raw material inflation and we’re hearing a bunch of companies sort of talk about the potential for pricing so what gives you the confidence that it will go through and that retailers and consumers will both accept the pricing? Then also, if we excluded the SAP piece, did you see any sort of sequential improvement as you went through the quarter that shows that consumers are in fact coming back and you can feel a little bit better about the consumer because they strengthened during the quarter?

Mark D. Ketchum

Let me start with the second, what we saw in the quarter again stripping out the SAP affect and the fact that some of our customers restocked their depleted inventories, we said what we saw that was attributable to increased consumer demand was about 2% to 3% lift. That’s something that we didn’t see a material change throughout the quarter, that was something that was fairly constant throughout the quarter.

The other thing that I’d tell you John is that is fairly consistent with what we had anticipated in the second half of the year so really the way I think you ought to think about it is we just saw it happen earlier in the year than we had previously anticipated. We thought we’d be kind of flattish in the first year in terms of consumer demand and maybe rising to those 2% to 3% core levels in the second half, we just saw it happen earlier and that’s a good sign. That’s what was behind us taking our sales outlook up a little bit is the fact that we’re getting a little bit of that consumer off take a little sooner.

On the pricing question, frankly on the Rubbermaid consumer business, our competitors have either followed or in some cases even led that pricing so that’s why we’re confident that is going to stick and believe that the investments that we’ve made in both exiting commoditized categories and in innovating and differentiating our products in the categories we remain in, give us confidence that those are price increases that can and will stick.

Operator

Your next question comes from Michael Kelter – Goldman Sachs.

Michael Kelter – Goldman Sachs

I wanted to ask you about the earnings guidance because it was the higher sales expectations and with pretty good margin guidance I’m having trouble footing to only a $0.03 increase in the guidance range. Is there some other cost that we should be aware of or is that really just conservatism?

Juan R. Figuereo

One first let me say that the guidance recognizes better than expected performance in Q1. We were already expecting modest sales growth and that came in slightly ahead of what we were expecting. It’s still early in the year and we are still cautious about the economy and finally, as we pointed out before Mark and the management team may choose to invest more behind some of our strategic initiatives. So, we are optimistic and we think that was about the right amount of change in the guidance given where we are and all those other factors.

Michael Kelter – Goldman Sachs

Then on gross margin and commodities, you said that you saw a lot of the headwinds already. Can you maybe detail which particular commodities are most difficult right now for you guys and which one maybe will be more of an impact later in the year?

Mark D. Ketchum

Well the single one that I think is most obvious is resin. Here’s the way I would look at first quarter, we didn’t have any positive impact from pricing because all of our pricing takes effect in second quarter that’s going to cover for some of the increases in the resin. Yet, we were able to deliver 100 basis point improvement in gross margin. Why we’re able to do that and it’s a combination of we had a strong mix affect and that’s indicative of the effectiveness of our innovation so as we introduce new products or replace existing products we’re able to do that at a better margin structure.

Also, every result is indicative of the strong productivity plans that we have. The way I think about covering for material cost input inflation is that if it’s what I call fairly modest or routine because we’re always seeing over a long period of time you see inflationary pressures that drive those costs up but I think we can cover that with productivity and mix. However, when those increases become more extraordinary as they do from time-to-time, rapid run ups than we will take pricing and the fact that we’ve invested in differentiated products improves our ability to do so.

Operator

Your next question comes from Wendy Nicholson – Citi Investment Research.

Wendy Nicholson – Citi Investment Research

I wasn’t clear on exactly how much the price increase was and I know you said the two businesses but sort of can you tell us what the actual percentage increase of the pricing was and on what percentage of your portfolio?

Mark D. Ketchum

Again, the price increases that have been announced have been in our Rubbermaid consumer business and our Rubbermaid commercial business. It varies on different items, I’m not going to give you a total number but it varies on items anywhere from 3% to 9%.

Wendy Nicholson – Citi Investment Research

I guess my second question, I know you don’t like to comment on specific quarters but between the pull forward of the sales from second in to first and then with the pricing having just gone through is it fair to say that we could be looking at definitely down earnings it sounds like in the second quarter but negative sales but also negative sales growth and potentially down margins just in the second quarter alone?

Juan R. Figuereo

Let me see how we answer this one without talking about the quarter.

Wendy Nicholson – Citi Investment Research

I just think it would be helpful so people kind of know what to expect. Obviously a big negative surprise would not be a good thing.

Juan R. Figuereo

Look at our guidance for the full year and we are saying, we’re estimating $30 to $35 million is about the pull forward. We expect then core sales improvement, we anticipate before the year is going to come in more in the back half but after the over delivery in the first quarter, a little better than we anticipated in the first half. So we wouldn’t be expecting any quarter really to be negative this year.

Wendy Nicholson – Citi Investment Research

Then my last question is just in terms of kind of your appetite for acquisitions? I know Mark you had said last year that while the macro was still so tough that was kind of off the plate but where are you now with your sort of higher confidence and your cash flow and all that? Is it time to open the doors and look at new things or where do you stand?

Mark D. Ketchum

I think it’s still a little premature to do that. We still want to continue to pay down our debt and reestablishing our solid BBB credit rating and we have to do a little debt pay down in order to do that. So, I think what I said before stands.

Operator

Your next question comes from Connie Maneaty – BMO Capital.

Connie Maneaty – BMO Capital

Just a couple of questions on some of the items that you talked about, the pre-buying of $30 to $35 million, in which particular segments did that occur because I forget? Is it limited to the second quarter or might there be a little spill over in to the third? Secondly, of the $40 to $50 incremental spending planned for the first half I think you said you spent a little less than expected in the first quarter so what did you spend in incremental spending in Q1 and how much goes in to Q2?

Juan R. Figuereo

First on the pre-buy this was Rubbermaid consumer products and Rubbermaid commercial products as Mark indicated earlier. It was in anticipation of the SAP go live that was early in April so you would expect that to impact only Q2. Generally people will not buy pre-buy behind a quarter. The third part of the question was just the overall investment is there’s some investment that just shifts, some customer programs and stuff like that just shifts between quarters. We anticipate that the level of investment is not really going to change on the first half. It’s still the same just a shift between quarters.

Mark D. Ketchum

So specifically that first quarter was up $14 million year-over-year so the balance of that $40 to $50 would be in the second quarter.

Connie Maneaty – BMO Capital

If I could ask a follow up to Wendy’s question. The question is on the M&A environment in general, I think you had a few assets that you were considering divesting. Are you seeing any more activity for those products? Is there more interest now than there was say a year ago?

Mark D. Ketchum

There is more interest and yet I wouldn’t tell you that it’s a prime opportunity so I think the prices are still depressed and so holding those businesses may be better than trying to divest them at this point in time.

Operator

Your next question comes from William Schmitz – Deutsche Bank.

William Schmitz – Deutsche Bank

I have a handful of questions so cut me off when you get bored. The first one is was there any impact from Venezuela in the quarter?

Juan R. Figuereo

The answer is yes, Venezuela reduced revenue by about $12 million and operating profit by $4 million. There’s an impact of about $0.01 per share. We had told you before that we thought Venezuela was going to hit us about $0.04 to $0.05 and that’s still unchanged, $0.04 to $0.05 and we took a $0.01 hit this quarter.

William Schmitz – Deutsche Bank

So only $0.04 to $0.05 for the full year?

Juan R. Figuereo

Yes.

William Schmitz – Deutsche Bank

Just in terms of SG&A, is that 25% ratio going to be fairly constant throughout the year? I know you said there’s going to be a big step up in spending the second quarter but isn’t the volume higher too because of the sort of pre-sell on the back-to-school stuff?

Mark D. Ketchum

Yes, you’ll see some variability on that. Our third and fourth quarters are typically our heaviest investments in strategic SG&A, third quarter behind the exploitation of our back-to-school and fourth quarter because some of our products are seasonal and holiday gift giving kind of related.

William Schmitz – Deutsche Bank

Then in terms of the inventory restocking, do you think that was a one quarter event? Are your retail partners pretty good with their inventory levels now or do you think there’ll be some more restocking going on?

Mark D. Ketchum

We don’t anticipate any additional significant restocking. As you know, this isn’t an exact science but some of our customers had stated that they’re not going to restock inventories that they think they’re about right. We obviously can compare what they have in inventory and what their POS looks like and based on that our estimation is that this was a onetime event. It was a good thing because it says that they’re more confident that their consumption is coming back but probably not a lot more benefit from restocking going forward.

William Schmitz – Deutsche Bank

Then in the SG&A guidance, you come in way ahead of plan so how about in terms of instead of compensation accruals, are you going to kind of revisit that as the year goes on or do you think you’re pretty well accrued right now?

Juan R. Figuereo

We accrue on the basis of results versus plans so whatever the results reflect you can assume that there will be the proportionate amount of incentive accrual related to that.

William Schmitz – Deutsche Bank

Then the last one I promise, the product line exits are done now?

Mark D. Ketchum

Yes.

William Schmitz – Deutsche Bank

So it’s going to be clean from now on so the organic and the core should be the same number effectively right?

Mark D. Ketchum

Well, no. When you say they’re done they’re done meaning that we’re out of the categories we want. There’s still a hangover effect Bill in the second quarter of last year and in the third quarter of last year we were still selling some of the product lines that we are now no longer selling so there still is a hangover effect for a couple of more quarters.

William Schmitz – Deutsche Bank

So I’m in correct. The organic number ex currency will be different than the core sales number?

Mark D. Ketchum

That’s correct. When I said they’re done we’re out of the things that we’re going to get out of. We don’t have any more new things to get out of but the year-over-year metrics will still show some effect.

Operator

Your next question comes from Lauren Lieberman – Barclays Capital.

Lauren Lieberman – Barclays Capital

I just wanted to follow up on the tools, hardware commercial business because it sounds like you’ve got growth on the strength of international so could you just remind me what is the split of that business US versus international? Then secondly, I’m assuming and I think I hear you commented it was mostly US where there was restocking? That was all really customer demand driven, is that correct?

Mark D. Ketchum

Let me try and take them sequentially. On the first question, your first question was what portion of the tools, hardware and commercial business is international?

Lauren Lieberman – Barclays Capital

That’s right.

Mark D. Ketchum

It’s a little less than half but it’s still one of our larger businesses. It’s one of the largest businesses in terms of this percentage, it’s above the company’s average.

Lauren Lieberman – Barclays Capital

Then in that business that was all customer demand driven or was there restocking?

Mark D. Ketchum

It’s one of the businesses so the two businesses that we referenced that we said we saw customers restocking in was tools, hardware commercial and office products. We also I think told you if not I’ll tell you now that directionally that restocking was in our commercial and industrial channels so that had more of an impact on those businesses.

Lauren Lieberman – Barclays Capital

That restocking was in the international portion of the business?

Mark D. Ketchum

Well again, most of the restocking was in developed markets so that would be western Europe and North America. What was saw was kind of a combination of two things diving that business. We saw some strong organic growth, a faster rebound, we saw that I referenced the China Lenox business that we saw really strong results on. I think I referenced in my remarks the Latin America tools, hardware and commercial products business that was up substantially. So those weren’t related to restocking but we did get restocking help in North America and Europe in that business. So you have two drivers, in developing markets it’s a faster return of consumption and in developed markets it’s some of that but a bigger affect, a bigger positive affect from restocking.

Lauren Lieberman – Barclays Capital

I’m thinking through go a couple of quarters down the road when you start to see some resumed demand in developed markets what that would look like and just to confirm that there was no restocking internationally.

Mark D. Ketchum

There is some restocking internationally but that would be in Western Europe.

Lauren Lieberman – Barclays Capital

The final thing was just the $30 to $35 million pre-buy is there any chance you could split out for us how the sell betweens were in the commercial versus consumer?

Mark D. Ketchum

We could but we won’t.

Operator

Your next question comes from Joseph Altobello – Oppenheimer & Co.

Joseph Altobello – Oppenheimer & Co.

The first question I guess I just want to go back to the restock and I certainly don’t want to get too far in the weeds here but I interpret that as your sell in in the first quarter exceeded sell in by about two to three points, right?

Mark D. Ketchum

Yes.

Joseph Altobello – Oppenheimer & Co.

So if we go back last year there was a destock going on so even though it is restock impact is a one quarter phenomena you guys will still benefit in the next call it two quarters or so because you’re lapping periods where there was a destock going on?

Juan R. Figuereo

The way that would work Joe is we would have to be making a call on the economy. To the extent that retailers feel comfortable now where they are in terms of their stock levels they would only increase them if there is an increase in their outlook for demand in the balance of the year. Our assumption now is still what it was in terms of the economy kind of a slow recovery.

Joseph Altobello – Oppenheimer & Co.

But the growth numbers you’re going to report in the next two quarters or so are still going to benefit from a lower base period because of that destock?

Juan R. Figuereo

Yes, absolutely.

Mark D. Ketchum

But I don’t think trying to over analyze the destocking and restocking affects – why I say that Joe is because the destocking that went on last year at unfortunately every one of our channels and customers was in response to a couple of things. One is obviously in response to lower consumer demand. But, it was also in response to capital conservation on their part just like we were doing as well. I think what many of them learned is that they can operate effectively, they’ve put in systems and just put horsepower behind being able to operate with lower inventories.

So I think you’re going to see some of that inventory never come back in to the system so trying to calculate the inventory take outs last year and put a relationship to that inventory rebuild this year, I don’t think you can do. Now, what we saw in the first quarter is it is certainly a net positive for our business, it’s a onetime help and that’s good. As I told you, I also think it’s a good indicator of the increased confidence that some of our customers have that they’re going to see a return to consumption.

In that regard, that maybe that is a positive indicator. So when you talk about benefitting going forward, the benefit if any, is if those customers who are restocking are right, they’re betting on a higher rate of consumption and obviously that would be beneficial to us.

Joseph Altobello – Oppenheimer & Co.

Then in terms of the pickup in underlying consumer demand, it sounded like Mark you had said earlier that that was pretty consistent throughout the quarter. You did not see that accelerate in to March and April?

Mark D. Ketchum

No, not really. Again, our systems are doing that. In virtually none of our categories do we have measured markets that we can get from Nielsen or IRI or those kinds of services. Our sophistication of being able to understand that wouldn’t be that good on a month to month basis anyway.

Joseph Altobello – Oppenheimer & Co.

Just one last one, any impact from the healthcare bill on retiree health benefits? Any charges in the quarter?

Juan R. Figuereo

There was a small impact, it was immaterial Joe.

Operator

Your next question comes from Budd Bugatch – Raymond James & Associates.

Budd Bugatch – Raymond James & Associates

As you look at the flow through of operating income, we don’t know the project acceleration parsing by segment but it looks like office products had about a 48% incremental margin and tools and hardware had just under a 20% incremental margin. Can you help us think how we should look at that going forward?

Juan R. Figuereo

Are you asking us to project what we think in terms of margins by segment?

Budd Bugatch – Raymond James & Associates

I’m trying to get you to help us figure out what’s happening incremental margin wise, the fixed cost, the variable costs equation so that as you look at it segment-by-segment?

Juan R. Figuereo

Well, we haven’t given guidance segment-by-segment but what I would suggest is that you look at the overall guidance that we gave and we did say SG&A 25% or less and we did say we expect gross margins 75 to 100 basis points. That should give you kind of a broad indication overall of what the P&L should look like for the year.

Budd Bugatch – Raymond James & Associates

Let me try and get at it this way Juan, office products looks like it had a much higher flow through to the op line than did tools and hardware. Would that be a wrong way to read that? What we don’t know is how you parsed the restructuring or the project acceleration charges segment by segment.

Juan R. Figuereo

Well, there’s annualization impact but I would tell you that when you look at kind of relative operating margin in relative terms that tools, hardware group was actually stronger because they tend to have much lower margins in the first quarter. At project acceleration there’s the annualization of that will impact the margins quarter-by-quarter in each segment and frankly, I don’t think we’re prepared to talk to that level of detail.

Budd Bugatch – Raymond James & Associates

Looking at the business geographically, I think last year or in the first quarter Europe lost $7 million after translation. How are you looking at it geographically or do we need to wait for the Q to see that?

Juan R. Figuereo

The press release includes the geographic information.

Budd Bugatch – Raymond James & Associates

At the operating line?

Juan R. Figuereo

No, we have sales.

Budd Bugatch – Raymond James & Associates

Right, I understand the sales, I’m looking at the operating income line.

Juan R. Figuereo

Europe was up significantly in operating income margin year-over-year.

Budd Bugatch – Raymond James & Associates

Well, last year was a loss from the information in the Q so this year was profitable?

Juan R. Figuereo

It was. While we address other questions I’ll look it up.

Budd Bugatch – Raymond James & Associates

My last question is Mark you talked about the technical side of office products doing very well, the Dymo, Endicia and Mimio, can we get a feel for now what percentage of office products those technical products are today?

Mark D. Ketchum

No. Again, that’s not detail that we’re going to be giving out.

Operator

Your next question comes from Mark Rupe – Longbow Research

Mark Rupe – Longbow Research

On the tools, hardware and commercial segment, just following up on Budd’s question that you had cited that it’s seasonally weaker in the fourth quarter. Can you just remind us of that? Because, it looks like given the sales level in prior quarters I would have thought that that margin would have been a little higher in this quarter?

Mark D. Ketchum

I’m not sure I follow your question.

Mark Rupe – Longbow Research

Juan had mentioned that in the first quarter that the tools, hardware and commercial segment margin tends to be a little bit weaker than the other quarters. Number one, I was just curious to see why and historically it has always been kind of a weaker sales mix seasonally for that segment but in this particular quarter it seems like the sales level was at levels that would have suggested a higher contribution margin.

Mark D. Ketchum

Again remember, the sales levels were impacted in that segment by both the combination of the SAP pre-buy and the customer restocking. So they had a larger than – we’ve talked about 2% to 3% for the company for both of those factors but obviously for that segment it would have been significantly more than that.

Mark Rupe – Longbow Research

On the Rubbermaid commercial pull forward, was that strictly North America or was that globally?

Mark D. Ketchum

No, that would have been just North America.

Juan R. Figuereo

Let me go back to Budd’s question. Budd I looked it up, Europe and this was on a normalized basis, keep that in mind, that may be different from what you see in the Q later but on a normalized basis, Europe’s operating margin was 3.7% which is a big improvement from negative in the prior year.

Operator

Your next question comes from Jason Gere – RBC Capital Markets.

Jason Gere – RBC Capital Markets

I just have two questions, one I guess can we just talk about the home and family trends that we saw in the first quarter? You went over earlier just parceling out the offsets, I think it was like baby was weak in Japan, but can you just kind of go through was there any type of a slowdown there on any types of the customer spending where if you think about 2009 this was one of the areas that you didn’t see as much of an impact as some of your more discretionary areas?

Mark D. Ketchum

I think that’s a good starting point Jason. We didn’t see as much of a negative impact and therefore we’re comping against relatively more stable numbers from a year ago. That said, we had two drags on the quarter. The one was in baby and parenting which is primarily because of the Japanese business, the Aprica business which is a business that really operates in the luxury segment of the market has been very hard hit and has not yet come back in Japan. The other piece was beauty and style where the timing of a major customer reset is affecting. It’s going to move business out of the first quarter and in to the second and third quarters. So sequentially I think what you ought to expect is that those business are going to get much healthier going forward especially in the second half of the year.

Jason Gere – RBC Capital Markets

Then just on that, just with the Graco line which is I guess the line that I can afford, is there anything to look in to on the R&D side? I know there’s been a lot of recalls on strollers, car seats, now I think on the cribs, just anything to read in to that? It’s just something I’ve been seeing a lot of over the last couple of months?

Mark D. Ketchum

Honestly, I think the only thing that you can read in to that is that there is a kind of shift in the focus of the CPSC and so I think you’re going to continue to see a higher level of recall kind of activity. That’s a shift in their governance. The fact that we are the number one brand in North America means that we’ll be involved in many of those. Let me just use the most recent, on the drop side cribs, this is an example where all drop side cribs are affected because the legislation and the regulations is going to phase out drop side cribs entirely. There aren’t any new ones being manufactured.

But, it’s not surprising I think you would conclude, us being number one in share in North America that if there’s any recalls on things like that we’re going to be a part of it. I guess the last thing that I would tell you is that we treat this very seriously so while I also said that there is a kind of a shift in the regulatory environment to driving more recalls, we’re fully supportive of having very safe products in our consumers hands and making sure that they have an expectation and confidence in that safety.

So when we do a recall we handle it very aggressively, willingly, willingly aggressively I guess you’d say and we get good marks from our consumers, good feedback from them saying, “We’re happy with the way you’re handling this recall.”

Jason Gere – RBC Capital Markets

On that I have got to assume that the cost is immaterial but there’s probably a little bit more support spending to your moms out there just in terms of kind of making sure that they’re at ease with the products?

Mark D. Ketchum

Correct and we’ve got either the proper reserves or the proper assumptions in our forecasts. What we’re seeing is not from a cost impact standpoint it’s not extraordinary meaning it’s not materially different than most years for us.

Jason Gere – RBC Capital Markets

Then just the last question, you’re talking about some of the marketing spending and I guess with last year not spending as much because there wasn’t really much of an audience, how do you think about the spending this year doing things a little bit differently, a little bit more efficiently, coming out of the recession the discretionary nature of a lot of your products and getting customers to come back to buying where they haven’t shopped in maybe some time. Did you change that mindset a little bit or is this kind of sticking to what worked a few years ago and kind of going along those lines?

Mark D. Ketchum

I think our mix is constantly shifting and you wouldn’t have seen Papermate TV advertising a couple of years ago but it was partly because we didn’t have a lot to advertise in terms of new products. We have new products now, we advertise those. I referenced what we did, the advertising that we did behind the Olympics and we also used that as an opportunity to do a control test where we have regions with the marketing and regions without that marketing and as I said the regions where we did the advertising was up 10%.

We’re doing things that we haven’t done before and the other thing is that we’re doing a lot better job both measuring and testing the upside. So I think going forward I’m very confident that we’ll be spending on the things that work, spending on the things that resonate with consumers.

Jason Gere – RBC Capital Markets

The last question, you were talking about some of the distribution gains that are out there, can you put a percentage around it, like what percentage incremental shelf space may be that you got or new points of distribution? Is there any type of context that you can put in so that we can frame it?

Mark D. Ketchum

I think I’d be hard to put in a broad term that you’d be able to relate back to an entire category but they are significant. They might be 10% and 20% distribution gains within any given customer so they’re big distribution gains but I don’t want to come back and give you an average and it would be inappropriate to talk about the customer specifics until they’ve actually shown up in the market place.

Jason Gere – RBC Capital Markets

And that’s net against I’m sure there might be one or two losses out there to right?

Mark D. Ketchum

We get a lot more wins than losses.

Operator

Your last question comes from William Chappell – SunTrust Robinson Humphrey.

William Chappell – SunTrust Robinson Humphrey

Just a little more color on the SAP implementation. I guess I’ve heard in the past customer buying in front of a price increase but I don’t think I’ve heard it as extensive in front of an SAP implementation and this is certainly not your first one. Was there a forewarning to clients that things might be off kilter?

Mark D. Ketchum

Not at all. I guess I would say a couple of things, number one, this is the fourth big cut over that we’ve done in SAP in our businesses and all of them have been extremely successful with no customer blips. However, that’s not the case with other vendors, other manufacturers who have implemented SAP. There have been even recently other companies that do these cut overs and they don’t all go well and they can’t ship for a few days or the orders aren’t correct and things like that. So some customers just continue to worry even though we’ve had a successful track record of doing this three times prior to the Rubbermaid conversions that we just went through.

But, nothing to worry they want very smoothly so in hindsight those customers can now look and say, “I guess we didn’t need to do that.” But they do it regardless because they’ve had a bad experiences with others.

William Chappell – SunTrust Robinson Humphrey

It sounds like it was just a handful of customers not widespread?

Mark D. Ketchum

Correct.

Operator

If we were unable to get to your question during this call please call Newell Rubbermaid investor relations at 770-418-7662. Today’s call will be available on the web at www.NewellRubbermaid.com and on digital replay at 888-203-1112 or 719-457-0820 for international callers with a conference code of 2949893 starting two hours following the conclusion of today’s call and ending May 14th. This concludes today’s conference. You may now disconnect.

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