Newell Rubbermaid Inc. (NWL)

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Newell Rubbermaid (NWL)

Q3 2012 Earnings Call

October 26, 2012 8:30 am ET

Executives

Nancy O'Donnell - Vice President of Investor Relations

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

Douglas L. Martin - Chief Financial Officer

Analysts

Constance Marie Maneaty - BMO Capital Markets U.S.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Wendy Nicholson - Citigroup Inc, Research Division

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

William Schmitz - Deutsche Bank AG, Research Division

John A. Faucher - JP Morgan Chase & Co, Research Division

Jason Gere - RBC Capital Markets, LLC, Research Division

Sarah Miller

Presentation

Operator

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

Nancy O'Donnell

Thanks, Mackenzie. Good morning. Welcome to our Third Quarter 2012 Earnings Call. With me this morning are Newell Rubbermaid's President and CEO, Mike Polk; and Doug Martin, our Executive VP and CFO.

Let me remind you that as we conduct this call, we will be making forward-looking statements. These statements are made on the basis of our views and assumptions as of this time and are not guarantees of performance. Risk factors that may impact these statements are discussed in the Risk Factors section of our latest annual report on Form 10-K and in today's earnings release.

Our press release and this call also contain certain non-GAAP financial measures including, but not limited to, normalized operating margin and normalized earnings per share. A full reconciliation with the corresponding GAAP measures is provided in our earnings release and is available on the Investor Relations section at newellrubbermaid.com. Thanks, and now I'll turn it over to Mike.

Michael B. Polk

Thank you, Nancy. Good morning, everyone, and thanks for joining our call. We have 3 objectives this morning. First, we'll review our third quarter results and provide our outlook for the remainder of the year. Second, we'll discuss the announced expansion of Project Renewal and the 5 new work streams that will accelerate our transformation. And third, we'll discuss the significant change in our organization design in my leadership team that will enable us to unlock the upside of the Growth Game Plan.

This new organization design aligns our resources to our 2 key activity systems, the work we do to develop our brands and categories, and the work we do to ensure best-in-class execution and delivery.

The new organization and leadership we've announced is designed to strengthen our business on both dimensions and lead to accelerated performance.

Our track record of solid results and our demonstrated ability to drive delivery, while simultaneously driving change, gives us the confidence to now accelerate the pace of change to more quickly realize our ambition of becoming a bigger, faster-growing, more global, more profitable Newell Rubbermaid.

A sign of our strength in performance and growing confidence is this morning's announcement of a 50% increase in our dividend, a step change that takes us to the high end of our stated dividend payout ratio target range of 30% to 35%. This is the second dividend increase we've announced this year and the third in the last 2 years, which reflects the board's confidence in the company's strong cash generation ability and in the potential of our Growth Game Plan.

Our new annualized dividend of $0.60 per share is up from $0.20 a share at the beginning of 2011, and now reflects a dividend yield of nearly 3% at yesterday's share price.

There's a lot to talk about, so let's get into the results. We've reported a solid set of third quarter numbers that represent a positive step towards delivery of our full year results in line with our guidance. Net sales were $1.54 billion, in line with consensus. Core sales grew 1.5%. Normalized earnings per share were $0.47, $0.03 higher than consensus and 4.4% better than our year-ago results. And gross margin improved by 50 basis points to 37.9%. Normalized operating income margin was flat to prior year at 13.7%, with the increasing gross margin offset by an absence of compensated-related benefits in the year-ago numbers. Operating cash flow was strong, at just over $300 million.

Looking at our results through the first 9 months, core sales have grown 2.2%. Normalized operating income margins up 20 basis points to 12.9%. Normalized EPS is $1.27, up 6.7% versus prior year, and operating cash flow is over $357 million, up over 27% versus prior year.

Let's take a look now at segment results. Our core sales growth in the Consumer group declined 40 basis points. This is actually a sequential improvement versus the first half run rate. Year-to-date, the Consumer group's core sales have declined 1.2%. Our strong Writing & Creative Expressions results continued in Q3, but were offset by macro-driven headwinds in our Fine Writing business in Europe and our ongoing challenges at J.C. Penney and Décor in North America. I want to recognize the Writing & Creative Expressions team for a successful Back-to-School season. They checked all 3 boxes, selling in Q2, followed by sell-through and replenishment in Q3.

This year, we exceeded last year's replenishment orders, which along with great sell-through results, contributed to a strong Writing outcome in the third quarter of 2012.

Total Writing category POS was up nearly 5% in the Back-to-School window, with Newell brands driving over 60% of the category growth.

Our Professional segment delivered core sales growth of 2.5% in the third quarter despite having lapped a very strong prior year quarter in which we reported core growth of 7.5%.

Year-to-date, Professional core sales have increased 4.3%. Professional growth is especially strong in North America, with share gains in most of our categories. North America Professional core sales grew over 4% in the quarter and are up over 5% year-to-date.

We are seeing softness in Western Europe and Australia, New Zealand on Irwin and Dymo as general macroeconomic concerns resulted in more difficult sell-in and sell-through. This offset some of the North American momentum.

Baby & Parenting had another strong quarter. Q3 core sales growth was 7.8%. Year-to-date, Baby core sales growth is over 10%. Baby's performed well all year due to very strong core sales in Asia as a result of the terrific new item performance on Aprica in Japan, and strengthening results in North America, fueled by better collaboration with customers and stronger Graco innovation.

Year-to-date for the total company, we continue to deliver strong emerging market core sales growth of about 12%. Core growth in Asia Pacific is over 13%, and we have over 12% core growth in Latin America.

The developed world has grown about 1%, with competitive levels of U.S. growth of 2.3%, partially offset by weak performance in EMEA, where core growth has declined nearly 5%.

Given the challenges in Décor, the U.S. growth is quite strong, with the combined Baby & Professional businesses delivering year-to-date U.S. growth of over 6%.

Let me now make a few comments on the balance of the year. As a reminder, we've guided full year core sales to increase between 2% to 3%. Normalized operating margin to increase up to 20 basis point, normalized EPS to increase 3% to 6%, or in the $1.63 to $1.69 range, and operating cash flow of between $550 million and $600 million.

As you know from our press release, we have reaffirmed our full year guidance across all 4 guidance metrics. Given the strong earnings performance in the third quarter, we now have a pretty good line of sight to the top of our normalized EPS guidance range. The key factors that will influence the outcome on normalized EPS and normalized operating margin will be the degree to which we accelerate brand-building investment in the fourth quarter.

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