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Newell Rubbermaid (NYSE:NWL)

Q1 2014 Earnings Conference Call

May 2, 2014 8:00 a.m. ET

Executives

Nancy O'Donnel – VP, IR

Michael Polk – President and CEO

Douglas Martin – EVP and CFO

Analysts

Wendy Nicholson – Citi Research

Chris Ferrara – Wells Fargo

William Chappell – SunTrust Robinson Humphrey

John Faucher – JP Morgan

William Schmitz – Deutsche Bank

Connie Maneaty – BMO Capital Markets

Joe Altobello – Oppenheimer & Co.

Olivia Tong – Bank of America-Merrill Lynch

Jason Gere – KeyBanc Capital Markets

Operator

Good morning, and welcome to Newell Rubbermaid's First Quarter 2014 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. A live webcast of this call is available at newellrubbermaid.com on the Investor Relations homepage under Events & Presentations.

A slide presentation is also available for download. I will now turn the call over to Nancy O'Donnell, Vice President of Investor Relations. Ms. O'Donnell, you may begin.

Nancy O'Donnell

Good morning. Thank you for joining us for today's call. With me this morning are Mike Polk, our President and Chief Executive Officer; and Doug Martin, Chief Financial Officer.

During today's call, we will refer to certain non-GAAP financial measures including but not limited to core sales, normalized operating margin and normalized EPS. Please note that we have provided the reconciliation of the non-GAAP financial measures to the most directly comparable results prepared in accordance with GAAP. The reconciliation maybe found in this morning's press release and in our filings for the SEC.

Please recognize also that we have provided risk factors regarding forward-looking statement in today's release and in our latest Form 10-K. Any set forward-looking statements reflect our current views with respect to future events. These statements are subject to risks and actual results may differ materially. We do not undertake to update any such statement whether as a result of new information, future events, or otherwise.

And now I would like to turn the call over to Mike Polk.

Michael Polk

Thank you, Nancy. Good morning everyone, and thanks for joining our call.

My goal today is to walk you through the underlying performance of the business and then explain why we're feeling good about our prospects moving forward. There's a fair amount of noise in the Q1 numbers, so I'll take the time to parse that out so you have a clear line of sight into our results and a good understanding of the opportunities and challenges ahead.

There's no doubt that the start of the year was not what we expected. You've already seen the announcement we made earlier this quarter about the harness buckle recall on Baby. And in the U.S., we were not alone in seeing an impact on retail sales from severe weather, which particularly affected our U.S.-centric home solutions business.

The Q1 top line impact, either one of these events might have been handled in stride. But both in the same quarter created the challenge called out in our early March press release. I see our team stepping up into this challenge nicely as we strengthen plans for the balance of the year. We become a stronger and more agile company, able to overcome these types of challenges, and I'm confident that we will.

Importantly, we have a strong pipeline of new ideas coming to market starting in Q2 and significant investment fire power that will flow from our cost work. We will reunite growth by pulling A&P bending forward from Q4 into Q2 and Q3. If at all possible, we'll look to replenish Q4 spend by doubling down un-generating savings. Our ability to do this will, of course, depend on the growth yield we get from the step up in Q2 and Q3 investment versus prior year and the margin expansion we generate between now and then. These revised plans are already in motion. While this will result in a different flow of growth and earnings than originally envisioned when we provided our outlook for the yearend in January, we are reaffirming our full-year guidance for core sales growth, normalized operating margin improvement, normalized EPS and operating cash flow.

As announced this morning, the boards approved a 13% increase in the dividend to an annualized rate of $0.68 per share. This is the fourth dividend increase in the last three years, demonstrating the board's continued confidence in Newell's strong cash generation ability and in the promise of the growth game plan.

With that as a background, let me dive into our first quarter results. Core sales grew 0.7%. While we're certainly not content with this result, I want to unpack the numbers so you understand the dynamics that underpin it. There were two key events during the quarter which disrupted our plans and are not indicative of our underlying performance. First, the baby harness buckle recall interrupted our two-year streak of nearly 10% global core growth.

Baby core growth accelerated through 2013 to 15% in Q4 and strong momentum carried forward into January of this year. This growth was disrupted by the recall and the previously communicated European exits with baby core sales down over 4% in the first quarter despite the very strong January.

In Q1, that nearly 20 percentage point core growth swing versus the run rate on the business cost the company as much as 200 basis points of global core growth in the quarter. The second event was the well-chronicled weather impact in the U.S., which most directly impacted our U.S.-centric Home Solutions business. While there are other things happening in this business that contributed to the overall performance, there's no doubt that lost point of sales due to weather-related store closures in the U.S. during the late January through February period impacted the flow of shipments into key mass food and specialty retailers.

The absence of these external events would have put Q1 core sales at the low end of the full year guidance range of 3% to 4% right in line with the suggestion we made for Q1 when we provided full year guidance. Importantly, an assessment of underlying performance should also consider the previously announced decision to exit roughly $25 million business in Europe in 2014 and the prior year pull forward of volume into Q1 related to the SAP conversion in Brazil.

Combined but netting out all double counting potential variables, these factors represented another 60 basis points of underlying core growth in Q1. So core growth of 0.7% in Q1, but with reason to believe that Q1 core growth would have been well into our full year guidance range of 3% to 4% absent these discrete events.

Normalized operating income margin in Q1 was 11%, down 20 basis points last year with good gross margin expansion of 60 basis points offset by increased advertising and selling capability investment. Q1 progress on gross margin is important, as we're beginning to see pricing land in stick and very good writing growth resulting in strengthened mix.

The cost associated with the Baby recall is $11 million. This reflects cost incurred on the harness buckle recall on toddler car seats that we referred to in our first quarter press release and now, our best estimate of cost associated with the potential additional recall of harness buckles used on some infant car seats.

Given the significance of the combined cost and their non-repeating nature, we have normalized this $11 million or over $0.02 out of our Q1 results. Importantly, Q1 normalized results do reflect the top line and operating income impact of lost toddler car seat sales during the roughly five weeks we were not shipping the effective product as well as the impact of product returns.

Normalized earnings per share was $0.35 and reported earnings per share was $0.19, both were equal to prior year period. Given the decision to now normalize out the non-repeating combined cost of the recall, our normalized earnings per share of $0.35 does not represent a $0.03 beat to consensus given our prior communication.

Our Q1 growth was led by our writing and tools segment partially offset by core sales declines in Home Solutions and Baby. Writing core sales grew 8% despite the exit of certain product lines in Europe driven by strong value and volume market share growth across the Americas. While writing had an easy year ago comparator in Q1, we're pleased with these results particularly in light of a continued contraction in retail real estate and the office superstore channel in the U.S. and Europe.

We continued to advertise Papermate InkJoy through Q1 and are now on air with a new very exciting Sharpie campaign. We have strong innovation, advertising and record merchandising plans set at back to school and we'll support our brand levels well beyond historic highs in Q2 and Q3.

Home Solutions core sales declined 4.5%. We saw some softness at point of sale and consciously reduced merchandising uncertain Rubbermaid consumer low margin product lines. These effects were partially offset by increased distribution on Calphalon and very good value and volume market share growth on Rubbermaid food storage and beverage.

We've taken some tough calls on portions of the Home Solutions portfolio on pricing and customer merchandising with the goal of strengthening the mix within the segment and driving profitable growth on portions of the portfolio where we can establish a susbtainable brand and product point of difference. We have a strengthening innovation pipeline on Calphalon, Levolor, Goodie and portions of the Rubbermaid portfolio. And we'll advertise Calphalon for the first time in many years this coming holiday season.

Tools segment core sales increased 2.4% driven by strong growth on Irwin in Latin America and building momentum on Lenox in North America and Irwin in Europe. Adjusting for the prior year pull forward of sales due to the SAP Brazil conversion, tools global core sales increased 5.2% in quarter one.

We have strong innovation in merchandising programs planned for the balance of the year in both North America and Latin America and are beginning to make progress on gross margin through strengthened mix and pricing. Commercial products core sales increased 0.2% as good growth on Rubbermaid commercial products was largely offset by a significant step back in our U.S. healthcare business.

The healthcare business was up against an extremely tough year ago period in Q1 related to prior year new distribution and pipeline film [ph]. Having the last -- the difficult Q1 comparator in healthcare and with the benefit of a significant investment in selling expense on the balance of the portfolio, the overall commercial product segment should now return to steady solid core growth.

Baby and parenting core sales declined 4.4% as a result of the exit of certain product lines in Europe and the U.S. harness buckle recall. The loss of momentum caused by the U.S. recall was significant as previously discussed. We have a very strong pipeline of innovation flowing to market through the balance of the year and are quite confident that we will recapture momentum in the business.

Point of sale is recovering on toddler car seats and we expect that to sequentially increase in Q2 and get back to solid mid-single digit growth in the back half of the year. While we may not be able to recover the lost sales from Q1 associated with the roughly five-week period where we were not shipping product and were off shelf, we're comfortable that we can and will recover momentum through Q2 and into the second half of the year.

So core sales growth of 0.7% in Q1, but underlying core growth that was well into our full year guidance range and future quarter core sales growth that will be considerably improved with the unexpected events of weather and recall largely behind us and strong programing and innovation in front of us.

With that, let me pass the call over to Doug for a more detailed review of our Q1 financials and then I'll return to provide a deeper perspective on the full year before opening the call for questions. Doug?

Douglas Martin

Thanks, Mike, and good morning everyone.

As Mike noted, there were some real bright spots as well as some challenges in the quarter. I'll start with the discussion of our Q1 results and then update you on operating cash, Venezuela, share repurchase programs and the balance sheet.

Q1 reported net sales were $1.23 billion, a decline of 0.7%. Core sales, which exclude the impact of unfavourable FX, increased 0.7% versus the prior year. Strong pricing in the quarter was partly offset by product line exits, the impact of the harsh weather on our U.S.-centric businesses and Baby harness buckle recall challenges. Reported gross margin was 38.1% and normalized gross margin was 38.8%, up 60 basis points over last year. Inflation and unfavourable currency were more than offset in the quarter by pricing and productivity.

Normalized SG&A expense was $342 million or 27.8% of sales, up 80 basis points versus the prior year as we continued to invest behind brands and capabilities despite the short-term sales challenges during the quarter. The composition of our SG&A spend continues to change as well as we increased advertising and promotion expense by about 10% in the quarter primarily to fund our InkJoy TV ad campaign in the U.S., Mexico and Asia. Normalized operation margin was 11%, down 20 basis points reflecting positive gross margin expansion, offset by continued investment behind our brands and capabilities.

Reported operating margin was 8.5% compared with 7.9% in the prior year. Interest expense was $14.4 million, essentially flat year-over-year and our normalized tax rate was 18.4% compared with 16.5% a year ago because the company recognized a lower amount of discrete text benefits in the current quarter.

Normalized earnings per share which excludes restructuring and restructuring related costs, cost associated with a harness buckle recall and the impact of the Venezuela monetary asset devaluation were $0.35, flat compared to year ago results with the benefit from a lower share count resulting from the accelerated share buyback plan offsetting a less favourable tax rate.

First quarter reported earnings per share were $0.19, equal to last year. We used operating cash of $92.1 million during the quarter, a $31 million improvement of the use of $123 million in the prior year. The change was driven primarily by the absence of an incremental pension plan contribution in the current year offset by larger year-over-year annual customer program and restructuring payments.

We returned $87.3 million to shareholders during the quarter including $42.9 million in dividends and $44.4 million for the repurchase of shares. The low number of shares outstanding contributed about one penny to EPS as we are now back to active status under our recently authorized $300 million open market plan, and we have $256 million left available under that authorization as of the end of the quarter.

I'll now move on to segment results. Starting with writing, reported net sales grew 6.1% to $361.3 million. Core sales increased 8%. Our Latin America writing business continued to deliver strong growth over 20% this quarter fuelled by pricing and the benefit of our InkJoy ad campaign in Mexico, Columbia and the Caribbean. North America had strong double digit core growth against a relatively easy comp last year and behind InkJoy advertising. EMEA sales were down high single digits largely as a result of planned exits.

The Q1 normalized operating margin in our writing segment was 21.3%, a 270 basis-point improvement over year ago results driven by pricing, productivity and project renewal related cost savings in Europe partially offset by the increased advertising spend behind InkJoy.

The Home Solution segment first quarter net sales declined 5.2% to $321.2 million. Core sales declined 4.5% due in large part to weather-related POS softness and the deemphasizing of some low margin businesses within Rubbermaid consumer. Calphalon had another strong quarter driven by recent distribution gains. Home Solutions normalized operating margin was 8.2%, a 190 basis point decline versus the prior year reflecting the deleveraging impact of lower sales volume and inflation.

The tool segment delivered net sales of $184.8 million for a decline of 4%. Core sales growth was 2.4%. You will recall that we implemented SAP in Brazil in Q2 2013 and we called out a pull forward impact in this segment of approximately $5 million last year due to this timing shift. Adjusting for this SAP timing-related shift, our underlying Q1 core sales were 5.2%.

This trend is largely attributable to our success in Brazil with our expanded tools offering in the back half of last year, which has driven both share and distribution gains. We're also seeing strength in the Lenox business in North America. Operating margin in the tools segment was 11.4% versus last year's 9.9%.

This improvement was driven by gross margin expansion behind pricing and improved mix. Reported net sales in the commercial product segment declined 0.3% to $182.6 million and core sales increase 0.2%. Favorable pricing in North America and Latin America was offset by weather-related softness in the U.S. and a difficult comparison against strong healthcare results in the prior year.

Commercial products operating margin was 7.6%, down compared with last year's 11.8% due to input cost inflation, mix and capability investments primarily in Latin America. Our Baby segment reported $179.3 million in net sales, a decline of 5.4%. Core sales were down 4.4% due to low sales volume and returns related to the harness buckle recall, lower sales in Asia and planned product line exits in Europe.

We anticipate a return to healthier sales volume trends in the balance of the year, and we expect Baby full year core sales growth of mid-single digits. Q1 normalized operating margin which excludes direct cost associated with the recall but does not adjust for returns or lost sales was 9.1%, down 350 basis points to last year largely due to FX and input cost inflation partially offset by pricing.

Looking at Q1 sales, core sales by geography, North America grew 0.9% with strong results from writing and tools and declines of Baby, commercial and Home Solutions. In EMEA, core sales declined 5.1% driven largely by planned product line exists of $6.3 million primarily in writing and Baby.

If adjusted for the impact of these exits, EMEA’s underlying growth rate was a negative 1.3%, which is a little better than our 2013 trend in our EMEA businesses. Despite the top line pressure from exits, the normalized operating margin in EMEA increased nicely year-over-year as a result of the project renewal European simplification actions that were taken to improve profitability. All thanks to the great efforts of the EMEA team.

In Latin America, core sales grew 10% despite the headwinds of $6 million of SAP timing-related pull in 2013. Adjusted for that pull forward, Latin America would have generated core sales growth of approximately 17%. And lastly, Asia core sales showed a slight decline of 0.3%. We saw modest growth from fine writing as we reached stabilization of the business this quarter and peak of sales declines coming off two years of very strong growth.

Now I'd like to take a minute to talk about Venezuela and FX in general. As we've said in the past, Venezuela represents about 1% of total Newell sales and 3% to 4% of operating profit, mainly in the writing business. Based on recent changes to the Venezuela currency exchange rate mechanisms, we have moved the rate we used to translate our Venezuela financial results into U.S. dollars effective March 31st to SICAD I. This resulted in a monetary asset devaluation of $38.7 million at the close of the quarter which is reflected in the other expense line in the as reported income statement and as exchange rate effect on cash and cash equivalents in the cash flow statement. The impact of the one-time monetary asset devaluation has been excluded from normalized earnings.

Subsequent to the first quarter, we will be using the exchange rate determined by periodic auctions for U.S. dollars conducted under Venezuela SICAD I, which was 10.7 Bolivar to the U.S. dollar at the end of the first quarter compared to the official exchange rate of 6.3. We expect the impact of changes in global currencies including the Bolivar to have an unfavourable impact on operating income. Based on current spot rates, we estimate the negative impact of translational FX to be between $0.04 and $0.05 per share for the remainder of 2014. The total negative impact of both transactional and translational FX is expected to be between $0.10 and $0.12 this year over last year, given overall currency volatility versus the U.S. dollar. This is incremental to a negative $0.06 impact in the prior year.

Additionally, the Venezuela government has issued a new law on fair pricing establishing the maximum profit a business can earn when in Venezuela. However, there's not yet clarity from the government on how profitability will be measured. We are continuing to evaluate the impact a new law may have on our 2014 operating results and have not yet included any further actions in our guidance.

I'll now switch topics and give you an update on our share repurchase programs and the balance sheet. We completed the $350 million accelerated share repurchase plan in the quarter taking delivery of the final 2 million shares in mid-March and purchased approximately 1.5 million shares in the quarter under the open market repurchase plan.

From a share count perspective, we're modelling an annualized average share count of approximately 282 million shares. And finally, our balance sheet remains very healthy after having returned to $87 million to shareholders in the quarter and approximately equal amount of dividends and share repurchases. We have $137 million of cash on hand, over $800 million in liquidity and no long-term debt maturities until mid-2015. Our debt to equity, EBITDA multiple and interest coverage ratios continue to be strong.

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

Michael Polk

Thanks, Doug. The progress we've made driving the growth game plan into action has made us a stronger and more agile company. We have robust plans for the balance of the year and we will increase brand investment significantly to reignite growth. We're well on our way to delivering the project renewal savings and we're strengthening our drive for further savings by scaling our sourcing activities, optimizing distribution and transportation and by value engineering our packs and products.

Our pipeline of new ideas and new products are the strongest we've had in recent years, particularly on writing, tools and baby where we will launch over 10 new products or platforms starting in Q2 through the end of the year. We are or have already created new stronger advertising on Sharpie, Graco, Irwin and Calphalon that will complement our very effective Paper Mate InkJoy advertising.

In all of these campaigns, we'll air over the balance of the year with record levels of media support. In this context, we’ve reaffirmed the full year guidance for 2014, core sales growth in the range of 3% to 4%, normalized operating income margin expansion of up to 40 basis points, normalized EPS of $1.94 to $2 or 6% to 9% growth and operating cash flow of $600 million to $650 million.

There are two key factors that could influence delivery in the year. The first is our ability to reignite growth. We're well positioned with a strong pipeline of new products, new advertising and new selling capabilities that will be supported with a significant increase in spending.

Our ability to support our brands at the rate we plan will also -- while also delivering the margin expansion and EPS growth we're committed to deliver will be a function of tight overhead management and gross margin development through the year. Project renewal savings and very tight discretionary spending will enable the delivery of the overhead objectives.

We're working gross margin from multiple angles of cost, price and mix with the ambition to create a deep pipeline of ideas that sustain gross margin increases through 2014 and beyond. Our 60 basis point increase in gross margin in Q1 is encouraging and slightly ahead of our original expectations, so we're off to a good start. Our work to establish Newell as a lean and efficient operations will be the critical enabler to increase brand support and growth acceleration, not just this year but over the balance of the growth game plan.

Given the challenge of Q1, reigniting growth will be the big focus for both our development and delivery organizations. Delivering core growth at the high end of the full year guidance range would require 4.9%growth for the balance of the year. Delivering growth at the low end of the core guidance range would require 3.6% growth for the balance of the year.

In the second half of 2013, we grew core sales nearly 4%. This gives us a line of sight and confidence that would significantly increase investment and stronger brand plans we can deliver in the full year core sales guidance range despite the tough start to the year.

Importantly, our core sales guidance assumes that a potential additional harness buckle recall related to certain infant car seats does not result in a significant retail disruption like the one experienced in quarter one, on toddler car seats. This assumption is consistent with our best estimate of the most likely of all outcomes. There is the possibility that we could reach a different resolution with NHTSA than that reflected in our core sales guidance.

The second factor that could influence our full year results is foreign exchange. This factor is pretty straightforward. Our reaffirmation guidance assumes we cover $0.04 to $0.05 of further negative currency, largely related to our decision to take the Venezuela bolivar to the SICAD I rate. We believe this to be the right assumption given what we know today.

While we don't provide quarterly guidance, there are two factors that could influence the flow of core sales and EPS over the balance of the year. The first factor is the quarterly profile of our brand investment. As mentioned, we will focus the significant step up in brand support versus prior year in Q2 and Q3 to reignite growth. This flow of spending will influence the delivery of EPS for the balance of the year.

The second factor is the shifting of shipments at quarter-end between Q2, Q3 and Q4 related to two unique events. With the timing of July 4th on a Friday this year, we could experience a shift of quarter two back to school writing shipments from the last week of June into early quarter three as retailers will be more reluctant to take inventory into their system before their floor stock of July 4th merchandising is cleared.

Additionally, on October 1st 2014, we will go live on SAP across the balance of Latin America. This will result in a pull forward of volume out of Q4 into Q3 to ensure smooth SAP transition. These two factors will drive a different profile results to last year with solid core sales growth in Q2 and a further step up in growth rate in Q3.

In Q4, core sales growth will be more modest with the full value of second half launches partially offset by the loss of volume due to the SAP pull forward into Q3 and the step down in brand spending related to our focused surge of investment in Q2 and Q3.

We believe the core growth and new spending flows could result in normalized EPS growth rates in the middle of our full year guidance range of 6% to 9% in Q2 and Q3 with a step up in Q4 to slightly above the high end of the range. So a different start in the year than we anticipated as a result of two unplanned events, the recall and to a lesser degree weather.

In the context of these challenges, we delivered a solid set of underlying results with very good growth on tools and writing, strong delivery of savings and encouraging progress on gross margin. Nearly one year after the restructuring of our marketing and R&D teams, our development organization is starting to hit its stride with stronger innovation and advertising flowing through the funnel to market.

Their work along with the strengthened capability in selling puts us in a good position to handle this year's challenges. Our business has come a long way in the last three years and I'm very proud of the work we've done and I'm especially proud of our people for their commitment in drive to strengthen our company. The challenge of Q1 raises the bar on leadership, driving us to act fast, to focus sharply on the things that matter and to manage our resources even more dynamically.

All great tests of the new operating model and a terrific opportunity to demonstrate what the new Newell is capable of delivering. We know that a sustainable acceleration in performance will come from Newell bringing the best we have to offer to our consumers, our customers and our people.

I see a new type of collaboration occurring across the enterprise as our new organization matures with increasing energy to execute winning ideas really, really well.

We're beginning to see in writing what's possible when we set the right ambition and build aggressive plans, just as we've done in Baby over the last two years. Next week, we'll bring all of our sales and marketing teams together to work on a much stronger set of 2015 plans in our second annual global planning summit.

Five hundred people from around the world and across our organization collaborating for 2015 growth. That's the growth game plan in action. That's our new operating model coming to speed. And with that, I'd like to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll go to our first question from Wendy Nicholson with Citi Research.

Michael Polk

Hi, Wendy.

Wendy Nicholson – Citi Research

Hi. Good morning. My first question has to do with the recall that you've gone through for Graco. And how confident you are that there aren't lingering issues associated with the brand equity or stuff like that? Or do you think that even once you get passed on whatever you need to do to fix the harnesses, do you have to enter into a prolonged period of higher promotional spending to support the brand, or anything like that?

Michael Polk

That's great question. Wendy, since the moment of the recall, we've been measuring consumer feedback on the brand. These brands are our greatest asset. This is a great concern. We've done and we continue to do research to understand how the -- particularly the immediate coverage impacted people's brand perceptions, and also how the disappointment in the quality issue we have on the buckle has influenced their perception of the brand.

And this is an incredibly strong brand and a very resilient brand. I'm very pleased that we haven't seen a step back. And I think part of that has to do with the way our marketing teams and our selling organization has engaged on the issue. It was incredibly disruptive, but our consumer services and customer services teams, along with our marketing and selling organizations have done a great job over communicating with consumers. This was a different kind of recall than any we've experienced before because of the nature of it in terms of breadth and also the timing between decision and implementation.

And that caused us to have some challenges with the respect to getting replacement parts to consumers. And the group did just an extraordinary job of managing that dynamic and I'm pleased that we can say that there hasn't been any noticeable change in equity or attribute ratings on the brand.

Wendy Nicholson – Citi Research

And can you tell us what percentage of the Graco brand is car seats?

Michael Polk

We haven't really communicated that Wendy before, but it's well into sort of 20%, 30% range. I'll just give you a sort of a bracket there.

Wendy Nicholson – Citi Research

Got it. That's helpful. And then my second question is just going back to what you just said at the very end about the planning meeting that you're about to have, which sounds great, I assume most of that is kind of innovation related and brand-building related, but are -- the conversations about either further product line exits also takes place there. I'm wondering specifically the $25 million of revenue that you're exiting in Europe. Is there a chance that number goes up? Are those the kinds of things that you entertain as well or are we kind of -- it's a portfolio set and SKU assortment kind of set at this point?

Michael Polk

Well, everything is on the table at those meetings. This is where our integrated marketing plans or global plans, our development team are building brand plans out for 2015 for the brands they work on and for the relevant countries for those brands. And the way this process works is that integrated marketing plan is translated into a national merchandising plan and then translated into joint customer business plans. That three-step process in building an annual plan for the company is what is initiated at these discussions.

So everything is on the table. It's a media spending. We've got a framework for what we intend to do in 2015, each brand does. That's been vetted through the marketing organization now. And now it's time to kind of socialize that agenda and also to talk about the more executional side of the business, core brand distribution, what the optimal distribution footprint looks like by brand, by channel, by customer.

And so, those are the types of conversations that are happening. We're talking about price increases for next year. At that time, we're talking about merchandising price points, merchandising frequency, all the display material that we'll use next year is being communicated, the frequency of off-shelf displays, back to school planning for '15 will be initiated at this call. So it's everything that you can imagine you would want to talk about along that dimensions I've just described from global brand plan to national merchandising plans, to individual joint customer business plan. So it's a very, very important meeting. It's a week long and these are full on working sessions for four and a half days.

We'll talk about, as I said, we'll talk about everything there. Your specific question about product line exits in Europe, we initiated those exits to be able to initiate the complexity reduction in our infrastructure. John Stipancich and his team led that work and it's yielding great margin improvement in Europe, and now we're on the verge of getting our European business back to growth ex those exits.

There are constantly conversations happening around mix within brands and product lines. Certain portions of our business have very high variable contribution margins and other portions of our business in some cases, have very low variable contribution margins. We need to think through all of those dynamics and how we set targets and how we pull [ph] portions of the portfolio for growth.

Those are constant on-going conversations. For example, we never talked about this in 2013, but we exited Goodie Electrics a year ago. If it's a substantial exit, we'll talk about it. A $25 million is a big number. If it's a less substantial exit, we'll manage it within our numbers but we're going to do the right things in terms of strengthening the portfolio while delivering against our ambition to accelerate growth as a company.

Wendy Nicholson – Citi Research

Terrific. Thank you very much.

Operator

We'll take our next question from Chris Ferrara with Wells Fargo.

Michael Polk

Good morning, Chris.

Douglas Martin

Hi Chris.

Chris Ferrara – Wells Fargo

Hey guys I guess, when you have adversity, obviously you have decisions to make, where you have to the balance delivering in the near-term with the long-term health of the business. So I guess, what I was hoping for was some color and context around the decisions you are making this year, right? So you are accelerating advertising and marketing, pulling it into Q2, Q3 to jumpstart top line growth. You are also absorbing another sort of nugget on Venezuela. I guess, talk through if you can, the decision process around not lowering guidance on Venezuela, accelerating the marketing, like what is the trade-off of accelerating that marketing if any, and how you're thinking about that stuff?

Michael Polk

Yeah. Well, I think it's really important. The first filter with all this -- in situations like this from my perspective, the first filter that we have a responsibility to apply is whether any choice we're making is consistent with the strategic agenda we've laid out for the business. And that's the first pulled filter that's been applied in this re-plan. So if this re-plan was going to result in us having to cut the step up in A&P support that we have built into 2014 as part of the strategic phase of the growth game plan, we would have just taken our lumps and gone to the market and dealt with that conversation with you guys on EPS because we're not going to mortgage the strategic agenda in the business. That's what we're accountable for delivery. And we believe it's the best path to value creation for our investors. And we have confidence and we’ve built confidence through last year that when we invest behind these brands, we can get a real growth yield and if we’re smart about how we manage, how we deploy A&P we can get a mix benefit as well, which you're beginning to see through the writing momentum that we've got in Q1.

So we were not about to mortgage that agenda item. That said, when you look at the growth game plan, you look at the five ways to win. There are two things that we talk about and we’ve organized the company around these two things. We believe we can do both of them really, really well, which is making our brands really matter, which is what the development organization has accountability for and building out an executional powerhouse, which is what the delivery organization has accountability for.

It's too early in the year given what we know and given a rigorous set of analytics that we've applied. It's too early in the year to mortgage the second pillar for the sake of the strategic agenda. And as I laid to you, it's plausible for us to get right in the middle of the range. Everything would have to go well. We couldn't have another misstep executionally or we couldn't have another event hit us, a material event hit us. But it's just month three. So I've never in my career ever pulled back on delivery in that context but to be very, very clear strategic priority and strategic agenda for the company first.

And then if we're comfortable that we're not mortgaging that, then by all means, there's no way we're pulling off our ambition to deliver the commitments we've made. If it comes to some point later in the year where that probability is not high enough, we'll let you know. But at this point, I'm comfortable as I've laid out in the material today that we can pull this off. I think it's a great test as a new operating model. It's a great test of our leadership team, and whether where you succeed or whether we don't succeed, it doesn't matter, we will all grow through this experience and we'll move on to 2015.

Chris Ferrara – Wells Fargo

Great. Thanks. And I guess one other on M&A, obviously, you've been talking about it a lot more at CAGNY. You indicated that you've got a number of deals. Can you just talk a little bit about what you're thinking about there, has your thought process changed at all or have you become more interested, less interested in doing deals? And what do you see out there in the environment?

Michael Polk

Yeah. So this is a really interesting opportunity for us as we sort of turn the corner through the midpoint of the year. And we really get the operating model up to speed and our capability start to getting traction. We then have the opportunity to complement all the organic capability and growth acceleration, capability deployment and growth acceleration to come through the plan with external development.

And we will certainly have the cash flexibility to do that. We have the borrowing capacity to do that. And as a result, in my narrative, I'm sure you've noticed over the last six to nine to twelve months you've seen M&A sort of start to feature a little bit more prominently in the dialogue.

We are out getting targets. I think it's really important given our track record and history in the space to make sure that whatever we do, we do really, really well and it creates a lot of value and it's not dilutive at all to any of the metrics if we can avoid it across the P&L and also to -- from an EPS perspective.

And for us, perhaps more importantly that it fulfils a strategic need that we got in the business. Remember we said we had five anchor categories, two of which are scale Home Solutions and writing and three of which are subscale and subscale to us means less than a billion dollars. So our ambition is to try to scale all five of those anchored categories. So our filters are strategic, but we also have the ambition to do things that are accretive and enhance, if we can, growth in margin when we do them. And it come with the package of synergies either cost or revenue synergies that are very attractive to us.

So when you start to apply all those filters, your ability to find the right targets becomes narrower and narrower. And again, I don't think it's right -- I think a long view on the agenda we have here, so I'm not in a rush to do anything. That said, we have a bunch of conversations going on. Mark Tarchetti and Jason Mullins lead that work for us. And when I say conversations, there are internal conversations going on.

And I'm hopeful we can find the path over the coming quarters and into next year to demonstrate our capacity in this area to execute acquisitions as brilliantly as we hope to be able to demonstrate on our core agenda.

Chris Ferrara – Wells Fargo

Thanks a lot guys.

Operator

We'll go to our next question from Bill Chappell with SunTrust.

Michael Polk

Hey, Bill.

Douglas Martin

Good morning, Bill.

William Chappell – SunTrust Robinson Humphrey

Good morning.

I kind of want you back to the shift in the A&P spend, and so with the understanding of your businesses are all a little bit different. Some of them are seasonal. And so you certainly had a reason why you had the A&P spend kind of weighted towards the fourth quarter. How easy is it to shift it, so that, how do you move it if it was planned for certain categories to other? Can you help me understand how you move it back, and then manage the business at the same time?

Michael Polk

Well, in the past, that would have been nearly impossible. That would have been like pulling teeth because of the way we were organized. You had a holding company structure with 43 different bonus pulls. Pulling resources and managing resources dynamically like what we've just done would have been really difficult from an execution standpoint within the design of the company we had.

We're different company today. We're an operating company, all the boys sit at that top table. We needed to make the choice that we were going to jump start. We've used this language to reignite growth. And we had increases in Q2, Q3 built into our first plan, as you know, based on our earlier conversations, and we have an increase built on top of an increase a year ago in Q4 in A&P support.

And so what we've done is we pulled -- to be very specific, we pulled some writing support out of Q4 and make sure it's really sitting right on top of our writing initiatives, and we've got a very, very strong plan on writing in Q2, Q3. Most of the investments that we've pulled forward is media behind the new campaigns that we're working on. We've also made the decision on Graco that we need to make sure that in the context of the disruption in Q1 that we had strategic plans to build a new campaign out for Graco. We haven’t advertised Graco in God knows how long. And we made the decision a year ago that we're going to work on advertising.

Well, we're fortunate to have made that decision because now we want to deploy that media behind the brand despite the fact that the P&L's taken a knock in Q1. And we were going to protect that investment and pull it forward a little bit so that we can get on with the reigniting growth there.

What's the mortgage? There were some support in Q4 on those businesses and some others. We pulled back a little bit on commercial products support. We pulled back a little bit on tools. But we protected the Calphalon spend in Q4, which is when we should be advertising Calphalon around the holidays.

And again, a brand that hasn’t been advertised in a very, very long time. But we're working on that communication as we speak. So it’s that sort of logic it's enabled by our structure, the fact that we're an operating company, it's enabled by the new operating model, it’s really Dough, Mark Tarchetti, Bill Burke [ph]and myself in a room, and we can decide what we need to do in moments like this. And that's effectively what we've done.

William Chappell – SunTrust Robinson Humphrey

And just a follow up on the Baby, your kind of understanding the dynamics behind that. But when you were out of the market for four or five weeks, what did the retailers do? I mean did they put it inside the label, did they put it in other brands? And so is it as simple as kind of coming back and saying, "Thanks for holding our thoughts. We'll take that space back"? Or how quickly are you able to get back in and re-establish yourself?

Michael Polk

We're back in already. Those spots don't sit there empty. They're savvy. They flow inventory into them temporarily. We obviously talk to them about putting some of our other items that weren't recalled into those slots. But they don't hand them off to somebody else. I think they understand the situations. This was a different one than we've had in the long, long time because of the fact that we were -- there were so much inventory in their system of this product.

We learned a lot of things through this experience about how sophisticated some of the systems are out there or how well they segregate inventory through their systems, traceability, all sorts of things that we will learn and adapt our programming around that would enable us to do it more efficiently. You would think that first in, first out would apply on inventory through retailer system but not always we've learned.

So you've got all those dynamics. And you've got the dynamic that our re retailer will not want the exposure of selling anything that's being recalled. And so you have to make sure that there's not going to be a circumstance where UBC [ph] will flow through their system after you think you've got a cleaned up into the retail environment because then they won't be able to kind of check the consumer out through the cash register, if it's a recalled. You'll be seeing a very reluctant to once they've stopped selling those items. Flick the switch and turn that sell back on. So you have to really spend a lot of time going through their entire warehouse, their inventory systems and making sure you caught everything. And that's the process that we went through. We are the leader in this market by far globally and in the U.S. We quoted you global growth rates of 15%. Our core growth rate in largely flat to slightly increasing market was well over 20% all of last year in North America and right into January.

So we're the one driving. We're capturing immense amount of market share right now in this business and we're the one driving the category. So we have those assets and I think those helped us move through the issue with the retailer because these things are unfortunate for them as well. They lose, it’s not just us who loses the revenues, they do, and our buyers lose their ability to reach their bonus target. So it's really a tough situation when you get into a place like we were in and have been in.

But I think that's largely behind us. We have the possibility probability of another dynamic unfolding on infant which we hope to get resolved in Q2, although our best view of that situation is that it would be far less dramatic at retail. But of course there's -- as we called out in the script, there's a risk that we may not end up exactly where we think our discussions with NHTSA will end up. But we made our best call on that, our best call does not presume a major retail disruption associated with the potential exposure on infant.

William Chappell – SunTrust Robinson Humphrey

Got it. Thanks for color.

Michael Polk

Yeah.

Operator

Your next question will be from John Faucher with JP Morgan.

Michael Polk

Hey, John.

John Faucher – JP Morgan

Hey good morning. I apologize for continuing to follow up on the baby piece. But my understanding of the situation is that this is due to -- or at least this is involving a co-packer that you guys use. And so your view on Baby has gotten more positive over the past couple of years as the revenue trends have accelerated. Is there any thought to changing the business model here where you say, "You know what, this is something where we need to bring this in house. That way you could potentially capture the margin opportunities, you get more control obviously at the expense of capital. Is there a thought in terms of potentially changing the business model on Baby as a result of this?

Michael Polk

Just to be clear, the issue that we're dealing with is a buckle issue, not a co-packing issue. And there's a company that we've procured these buckles from, our supply partner uses the componentry that we procure or define. And so the relationship we have with our partner has no way contributed to the situation we're in. I think if we look in the mirror and went back six or seven years and looked at our choice to use the primary buckle that's at the heart of this. In the context of the growth game plan, you wouldn't have made that choice.

So we own that decision and thankfully there are no safety incidents for us or for anybody else in the industry who use the same buckle. But in the context of building great brands with superior performance, that's a buckle you wouldn't want to have on a product and a brand like Graco. But we've got to live with legacy of things decided whenever they were decided within our company and we're cleaning that. We're cleaning that out.

But to be clear, it had nothing to do with our supply partner. We've rekindled a very, very strong relationship with those guys. And they deserve a lot of the credit for the impact we're having in the marketplace over the last two years and they're great partners and we're lucky to have them.

With respect to whether we want to vertically integrate or re-integrate, we've got a very high return on net assets on this business, we create a lot of value on this business if we can grow, even though it has dilutive gross margins to the fleet average. So I don't think this issue really warrants a re-evaluation of that. I think there's going to be other ways that we can apply capital to create value for our investors that are going to be much more attractive than that one might be. Not to say we wouldn't ever do it, but it has to be really thought through in where we fit on a list of opportunities. It’d probably be further down the list on other things we envision doing with our cash.

John Faucher – JP Morgan

Okay. And then a separate question on writing, you talked about the pricing in the press release there. Can you talk about – is the brand investment driving your ability to take price? Because a lot of companies that we covered just simply aren't seeing that type of pricing here. So what's driving that, how sustainable is that, as you look out over the next couple of years.

Douglas Martin

Yeah. John, this is Doug. I think our brands are strong enough to -- many of our brands are strong enough to take and sustain price. And the investing behind the brands is helpful. In the case of writing specifically, we’ve begun advertising InkJoy brand, as you know, in Latin America. And that's where a lot of our pricing is coming from in this business right now. So it's a combination of brand support and pricing and driving really nice volume.

John Faucher – JP Morgan

Okay. So is that more mix then or sort of straight price?

Douglas Martin

It's straight price.

Michael Polk

In Latin America.

Douglas Martin

In Latin America, right.

John Faucher – JP Morgan

Okay. Great. Thank you very much.

Operator

Your next question is from Bill Schmitz with Deutsche Bank.

William Schmitz – Deutsche Bank

Hi guys. Good morning.

Michael Polk

Hey, Bill.

William Schmitz – Deutsche Bank

Doug, just a quick one on the tax rate, I think I might have missed it. But what do you guys think the normalized tax rate is going to be for the year?

Douglas Martin

It hasn't changed, Bill. It's still between 24% and 25%. As you know, the thing that we have difficulty judging is when discrete items might hit throughout the year and they traditionally hit for us in Q1 and Q3, but it is difficult to tell in our rate. And those are items you can't actually build into a flat rate for the year, so they pop up. But I think 24 to 25 is still a good range.

William Schmitz – Deutsche Bank

Okay. Great. And then the advertising ratio for the year, did you guys ever say what you expect the ratio of sales to increase and how that's changed versus your previous guidance? And then you look broadly across the industry, and obviously, it's horrible for the brands. But there's tons of money that's moving from advertising to promotion. And so, are you tempted to take that path or have you taken that path a little bit? Any color would be appreciated.

Michael Polk

So we did move down that path last year, Bill. So as we built out the scale events that our merchandising teams pivot around. That was an investment we did make in 2013. Actually, this year, we're pulling back a little bit. We have some shifting between consumer promotion and merchandising devices. But the real step up in A&P is almost all advertising related in 2014.

And we haven't communicated an advertising ratio externally, but this is a very material step up in advertising investment in Q2 and Q3 well into double digit increases. And the bits impact is quite significant. And I prefer not to kind of give a specific number out for competitive reasons. But we last year spent at a much higher rate than our competitors and this year you'll see us spend even more significantly than our competitors.

It's our responsibility as the leaders in these markets to build the categories. Of course we're going to do it through our branded assets, so we're going to capture share as we are in our key strategic businesses, whether it's baby, whether it's a writing portfolio, whether it's our food storage, food beverage portfolio within Rubbermaid. Where we're making these bets we’re winning. And so we're encouraged by the responsiveness of the business to the investment.

And because of the way we're managing the company, we're taking the power of $6 billion company and applying it against competitive interphases -- at the interface between a category in a country against smaller competitors. We can flood those competitive interfaces with resources if we manage the resources dynamically and we don't let them get trapped in businesses.

And that's exactly what we're doing and that's why we see the share yield in the places where we've applied it. Our ambition is to obviously do that in more places and that's why the cost work is so important because getting the cost out enables us to cover more geography, more category country sales with that type of resourcing model. And that's why when we talk about our cost agenda, we talk about this unlocking the trap capacity for growth. Our drive to make Newell lean and efficient is inextricably linked to our ability to accelerate growth and our growth acceleration is a function of taking those call savings and deploying them against strategic investments, either in capabilities or in brand support. That's the algorithm we're trying to kind of implement. And it's early days, but if Q4 was a good indicator, I think Q1 when you really do the math on the underlying performance, yeah nobody is happy with Q1. But if you look at the underlying performance in the business, you feel okay about those gross rates given the spending level. And that’s' why we can be optimistic about the impact that we'll have in Q2, Q3. But time will tell. But it's a significant – your question was very straightforward. My answers is always long.

William Schmitz – Deutsche Bank

It's a good answer. And then just lastly, what was the home solution especially Rubbermaid home. You guys, the team has done an amazing job broadly across the portfolio, but it seems like Rubbermaid home is your kind of kryptonite. So is there anything there that -- a code you can crack, resin prices are at their three-day high. They're up 12% year over year. So that's not going to help the cost much in that business. But is there a point in time where you say, "You know what, screw it. It’s not worth it. Let's just move on"?

Michael Polk

No, it's a great brand. We're going to figure out this one out. This is my life mission. So I love the brand. It's a power brand and it's like any other brand. I've worked on some tough, tough brands before, coffee business, Maxilla House, not an easy brand. There are plenty of margarine, not easy brands. This is just another naughty -- there are plenty of margarine, not easy brands. This is just another not-easy brand. And so we're going to figure this out. I've got a really good team on Rubbermaid both on the delivery side and on the development side. And we're encouraged by the ideas that are coming through the innovation funnel.

We've got some of our best thinkers on this business. This is where shops design capability will be able to kind of really create value. By the way, we just opened that design center a few weeks ago. And so we're going to crack this code.

Now, just remember, Rubbermaid is 7 to 8 different businesses under one brand. We go up from everywhere from big storage codes to food storage to food beverage containers to durable water bottles to water coolers to outdoor sheds to outdoor décor to closet organization, to garage organization. So this is a big sprawling brand. Not all of the product lines within this brand are interesting to us. But many of them are really interesting to us and are on trend.

So this is going to take us a while. This will be our toughest brand challenge I think of all the stuff we've got going on. We're not ready yet to put real money behind it, but I think this is one of the most interesting businesses we've got and we're going to figure it out. It may take us another year to get it right, but we're going to give you evidence that even this brand can be cracked.

William Schmitz – Deutsche Bank

Okay. Thanks so much.

Operator

Our next question from Connie Maneaty with BMO Capital Markets.

Connie Maneaty – BMO Capital Markets

Good morning. I also have a follow up on home solutions, the business. What percentage of the home solution products are the ones that either you can't take pricing on or low margins or that caused you the trouble in the first quarter.

Michael Polk

I'll just tell you that the line. I'm not going to give you a percentage, Connie, but it's a big home organization, tods business which is the toughest business we've got. It's the most competitive business we've got and it's a place where it's not easy to create a product based point of difference that enables you to command a premium price. And that's the one that’s set a portion of that portfolio that will be trouble for us.

We may not get to all the other portions of the business that are right upfront in terms of renovating their design and their configuration. But this is probably the biggest challenge within the business. And of course, you can't just pull back the throttle on something that's sizeable like that those big tods are as a percentage of your revenue stream because you get into a fixed cost absorption with you and your factories.

So we're going through the process of understanding the variable contribution margin of every one of our product lines by factory. We're looking at the hours produced within those factories. We're figuring out how to reconfigure our demand and create the demand that enables us to absorb the right amount of -- absorb the fixed cost in these factories but on the businesses with a higher variable contribution margin. So we're not going to live the old ways that we have historically lived where the big volume-producing items with the low variable contribution margins absorb the fix cost, and we rationalize our gross margin percentage in the back of the assertion that they absorb the infrastructure cost. We believe we can grow the other portions of our business quite substantially. And so the mechanism by which you get this thing fixed is you invest in the product and the brand but in those other areas, such that your volume grows, you absorb the infrastructure cost and it gives you the ability to pull back on the portions that have lower variable contribution margin. You could argue, "Well, why don't you just scrip the asset down?" et cetera. We've done a lot of that.

So we've got to get this. We're in the process of unpacking this thing. It's really interesting. It's like a puzzle, which is great. So if you message to my people, if you work on this business, it's my favourite business even though it's the most difficult one because it's complicated and you've got to -- you work on so many different levels and dimensions to be able to unlock an answer here.

But the question was that before I think there is an answer in an algorithm to be found and we're getting really close. But the most unattractive portion of the business are the big tods, that’s the most competitive. And we're just not going to fall into the -- or step in the pot hole that we've historically stepped in where in tough moments for growth we lean in to that. I'm not doing that anymore.

So if that forces me to have a difficult conversation with you at some point in the future, so be it, on top line. But we're not going to do that because we're not -- by doing that we mask the underlying issue and we don't confront it. So we're working on it. It's going to take us a while.

Connie Maneaty – BMO Capital Markets

Okay. Thanks. And I also have a follow up on Venezuela. My understanding was that you need to report the rate at which you're actually getting access to dollars. And I also thought you were getting access at the 6.3 rate. So I'm wondering why you went to SICAD I if you were invited in? And also, if you made that -- that that was your choice. Why didn't you also -- did you think about going to SICAD II and just sort of like getting rid of the risk over the long term? Because you see, in two companies now go to SICAD II so I'm wondering what your thought process was.

Douglas Martin

Yeah, Connie, this is Doug. I'll take that. We actually are in profession in the industry that needs to record at the rate at which you expect to be repatriate earnings and or royalty streams as opposed to what you're daily transacting the business at. And for us, the most likely rate that that will be is SICAD I.

Now, to be clear, we continue to get approvals for under the old regime at 6.3 to get payment to vendors on an everyday basis. While we get approvals, we're not getting cash. So there still remains a tremendous amount of uncertainty as to when we can actually monetize those in U.S. dollars on our side.

And then from a SICAD perspective, when we look at the different classifications between SICAD I and SICAD II for our products -- and remember, our products in country are mostly in the writing business. They're mostly educational tools and we believe that they'll most likely fall in to SICAD I.

We haven't been invited to participate in either SICAD I or SICAD II at this point. But SICAD I is where we expect to go.

Connie Maneaty – BMO Capital Markets.

Okay. Great. Thanks.

Operator

Your next question comes from Joe Altobello with Oppenheimer.

Joe Altobello – Oppenheimer & Co.

Hey, thanks. Good morning, Mike. Good morning, Doug.

Michael Polk

Good morning, Joe.

Joe Altobello – Oppenheimer & Co.

I just want to go back to gross margin for a second and the expansion you saw this quarter. Obviously, you surprised us and it sounded like it surprised you to the upside as well. I wonder how sustainable that was. You mentioned that you're looking for a step down in promo spending this year. So was there any sort of one time item in that number or is that really a sustainable expansion number going forward? And if you could tease out, how much of that was from pricing, and how much from promotion?

Thanks.

Michael Polk

Yes. We got good price realization. Remember, we started to take pricing in Q4. We've got good price realization in the quarter. So that's a positive. How sustainable that will be? That will be a question over time and we have a set of principles that we need to embrace which are relative which are competitively driven. So we have price gaps that we are looking to maintain relative to our competition and that's the principle that will drive us because that's what in the brand's interest.

So there may be some movement and maybe some movement back on some of that pricing. But we'll see. It depends what our competitors do. To be clear, if our competitors match, then there won't be any reason to have to pull off of that number. That said, we think we're going to have a positive price impact to gross margin on the full year significant one in part because of the inflation that Bill was talking about on the resin based businesses. But in part because we can begin to price as we build these brands and build the equity in these brands. We're changing the value proposition in these brands and we think we can capture more pricing and be less merchandising dependent.

That said we spend a huge amount of money between gross price and net price. So don't think that we're pulling back hard on the throttle. We're just taking series of steps here. Mix is certainly a variable in Q1. Remember, Home Solutions was down lower gross margin. Baby was down lower gross margin. So that's a variable in the gross margin increase. Had the Graco recall not happened, we wouldn't have gotten a stronger gross margin outcome because Graco would have been stronger on the volume side, with mix of the business down a little bit.

That said, we still think we would have gotten margin increase. And so the differential versus prior year and our expectations, because we had expectations of gross margin increases in Q1, relates largely to that. We've got a significant amount of inflation that's figuring into gross margin well over 100 basis points in gross margin, which is what Bill was mentioning.

And so the long term algorithm for gross margin improvement for us is going to be fundamental cost -- productivity and cost management, sourcing savings and productivity through value engineering our packs and products efficiency work in factories, hard looks at distribution networks and distribution cost as a percent of revenue, transportation cost as percent of revenue. And mix, and maximizing the mix.

Those are going to be the things that drive gross margin increases for us going forward. And we're just beginning quite frankly to do that well. Mary and her team have -- we've reorganized the supply chain in the middle last year, big changes. Just like in every other aspect of our business, the folks, the new functional capabilities we're building are just beginning to get up to speed and to have the impacts we hope they will have over time.

So this will become one of the key enablers going forward. We expect and we need the gross margin increases in the full year. And our ability to increase spend is in part dependent on that, as I mentioned, in the factors that could influence delivery and also dependent on continued progress on overheads.

Joe Altobello – Oppenheimer & Co.

Okay. That's helpful. In the (indiscernible) one question. Thanks guys.

Michael Polk

Thanks Joe.

Operator

We'll take our next question from Olivia Tong with Bank of America-Merrill Lynch.

Olivia Tong – Bank of America-Merrill Lynch

Great. Thank you. I appreciate it. Just on the outlook on sales, can you talk about some of the puts and takes of the sales outlook that gets you back to plus three to four because obviously baby is a little bit lower and it'll take some time to get back to a steady state. But it sounds like you also have a delay in some of the office consolidation which is probably giving you some cover. So can you walk through some of those puts and takes please?

Michael Polk

Yeah. So obviously, the ODO and OMX merger, Office Depot, OfficeMax merger, and -- what we anticipated in Q1 with respect to store closures and consolidation of networks, et cetera, that hasn't happened. In the cadence we thought it would, and that certainly contributed in some ways to our writing success.

We've been very engaged with Office Depot and we have a good plan in place, good joint customer business plan, a better one than we have last year set now for the new entity. And we expect to have and are hopeful that if we execute well, have a very, very good back to school merchandising drive period across the total company. But in particular, the change in our conversations with Depot Max versus our conversions last year should strengthen our overall performance there.

So that's encouraging and that's a positive with respect to guidance relative to what we thought we would have when we first laid out our plan. So kudos to the team for planning a path to a better discussion. And we're hopeful that in execution, it actually yields an outcome.

We're more bullish on writing overall as a result of the brand work that's going on. We're relaunching Mr. Sketch. We're launching Clear Point Highlighters on new really innovative item on Sharpie. We've got the momentum really building now on InkJoy from a share and from a geographic perspective. We've got Finepoint Expo going to market. We've got a lot of stuff going on in writing, six months ago I would've been confident talking to you about. The new Sharpie advertising tested extremely strong. Three times the U.S. national average of all ads ever tested in all industries. Three times as effective along the metric that we look at to measure effectiveness amongst our testing partners inventory of all testing ever done. And this is one of these testing partners that does big company testing.

Our confidence in the impact of the work of developments doing is increasing in that, and that work is focused on our most strategic businesses at this point. So writing, I'm encouraged. It's too early to high five because Q1 was an easy comp, but we'll see. So that's one of the reasons to believe.

The other reason to believe is the responsiveness of the Graco business. So we're back in distribution now. We've seen a nice step up. We won't see April results for another day or so, but based on the acceleration results through the month of March once we got the issues behind us – and the point of sale data, I'm hopeful that we can rekindle growth faster than maybe what our core assumption and our forecast looks like. So there’s some opportunity there.

I think the step back that we experienced on Home Solutions and to a lesser degree at home centers on Rubbermaid commercial products, we'll get a bounce back effect on some of the weather effects in Q2 as most of the home center guys have communicated externally. So there's a reason to believe and that the step up in advertising support Q2, Q3 is really quite profound. So if it doesn't work, we won't do it again. I guess it's the headline.

But I'm really going to be interested to see what kind of POS lift we get as a result of that kind of investment.

Olivia Tong – Bank of America-Merrill Lynch

Great. Thanks, Mike. Appreciate it.

Operator

Your final question comes from Jason Gere with KeyBanc.

Jason Gere – KeyBanc Capital Markets

Good. I mean Thanks for squeezing me in, guys. I guess, just more of a bigger picture. I want to talk a little bit about Asia. I mean, if we think about the plan longer-term, Latin America is obviously hitting its stride, your Europe efforts to stabilize are working. So when we think about the long-term organic sales or core sales in that 3% to 5% range, Asia seems to be the missing ingredient. So I was just wondering if you can maybe talk a little bit about the selling capabilities, the infrastructure that is in plan, to really focus on when top line acceleration will come in. And whether some of the issues that are going on in some of the other businesses, other geographies are kind of slowing down the plans to get Asia up and running in 2015?

Michael Polk

Jason, our strategic thinking around this as you recall when we talked about the growth game plan at the very beginning was that we were going to increase the margin in the developed world as a mechanism for having the investment firepower to drive growth through two different means. One is market share growth in our home markets, and secondly, the deployment of our portfolio to -- a selected portions of the portfolio into the faster growing emerging market in a disciplined way; first, south to Latin America and next east to Asia.

So that's the narrative that we put out there and that's the plan we're executing right now with a real intense focus on scaling Latin America. But the next horizon is it's not just China. It's Southeast Asia and China. We have a huge opportunity. We don’t sell anything in Indonesia. We don’t sell anything in Vietnam. We have a limited portfolio available in the Philippines. We have a good business in Thailand and Malaysia in writing but we don't have the rest of the portfolio there.

So there's a huge opportunity for the company. I think it's fair to say that the next chapter of the company -- the next five year plan, we'll have Asia right in the center of it. That said, we're going to begin to move to east here over the coming years. I think with the real focus in 2016 with the start of that agenda in the late 2015 with a real interest in our win bigger categories in the baby business, particularly in China for the baby business.

And so, I think that's the way you should think about it. We're in the planning stages now. We've got a lot of work to do on route to market, as you say, on sourcing, and on the brand. We're focused in that work and the inside work on writing today and in China. We're thinking about Southeast Asia on tools and commercial products where we’ve made progress on route to market under Curt Rahilly's leadership on commercial products.

But I do not think you should build into your models a big step up in Asia performance. I think the window to think about that is 2016, 2017 because we don't want to enter these markets in a way that's not sustainable and is not focused on building brands. In the past, we've sometimes been a little bit too opportunistic in pursuing revenue in some of these moves. And we don't want to do that. We want to build a business that's going to be in those countries 30 years from now, not a business that’s going to be there for 18 months and give us a nice pop of growth.

Jason Gere – KeyBanc Capital Markets

Okay. Great. This sounds like everything is on plan there. So I'll leave at one question as well in the interest of time.

Michael Polk

Thanks Jason.

Operator

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

Michael Polk

My closing remarks I think will be really focused which is I really appreciate all the challenging and the support through what's been a tough first quarter and your questions, your commitment to stay connected to what it is we're doing. It's very helpful to us as a management team as we try to chart the path forward. So we're optimistic about what we're going to be able to deliver on the year despite the disruption we've had in Q1 and it's going to take my team fully embracing the challenge.

And from what I've seen, the folks have really immersed themselves in this area and some may even relish the challenge. So with that, I'll close the call and I appreciate all the feedback and the challenge and the support.

Talk to you soon.

Operator

That concludes today's conference call. Thank you for your participation. Today's call will be available on the web at newellrubbermaid.com and on digital replay at 888-203-112 domestically and 719-457-0820 internationally with an access code of 6886528 starting at 12 pm Eastern Time today. This concludes our conference. You may now disconnect.

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