Newell Rubbermaid Inc. Earnings Call Nuggets: U.S. Retail Channel, Professional and Baby Businesses

On Friday, Newell Rubbermaid Inc (NYSE:NWL) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

U.S. Retail Channel

Christopher Ferrara – Bank of America: I guess, I was wondering, if you can just talk a little bit about the retail channel in the U.S? Obviously, good January, February numbers may be less so in March, but particularly I guess in the DIY businesses for you guys in those channels, how have the channels progressed, what’s your view there, how have your share positions progressed in those markets?

Michael B. Polk – President and CEO: Look, we feel good about the underlying consumption momentum in our business. You see that in our share results on many of our businesses, not all but most. So, we see good share progression and we see decent category growth rates as well. So, we feel pretty good about the underlying conditions in the U.S. at least. Europe is a different story, but U.S. looks to be a more interesting environment than it was a year ago. Now some of those conditions and some of the growths specific to our Professional businesses may in fact an artifact of — perhaps a little bit of an earlier spring in half the country, but in general, conditions looks pretty good. There are number of our retail partners who are changing their merchandising strategies and approaches and those are things that we don’t control, we have to adapt to and we do that in partnership with them and those are choices they make in the context of their strategic agenda. We see that happening in a couple of places, but no more so than you would normally see. Our challenge, our leaders have to adapt to that environment and figure out how to adapt their merchandising programs and their marketing programs to that reality. As I said, in general the environment’s not – is looking a little bit more favorable than it has historically, historically being defined in the last six quarters or so.

Newell Rubbermaid Earnings Cheat Sheet>>

Christopher Ferrara – Bank of America: Since you brought it, can you talk a little bit about – a little more detail on what you were just talking about some changes in how the retailers are doing things. What do you mean by that I guess and what sort of changes are you guys going to have to adapt do you think?

Michael B. Polk – President and CEO: There are some that are happening in a way they work for us and some that are happening in a way that creates some uncertainty, but are important for the retailers. So, the most probably profound change that’s out there that we look at is J.C. Penney’s (NYSE:JCP) change in strategy, which for many of our businesses has an impact on how they merchandise. It’s not a bad thing, it actually has the potential to be a good thing. As retailers transition from one point of view to another, you need to move aggressively and be in touch with what are those they are trying to accomplish. Of course we have to bring our agenda to life through their strategic framework. I always say that, if we want to go to market in the language of the customer and in the context of their strategies, and our agenda needs to sync up and be amplified in the context of what they’re doing. That’s probably the most significant one at the moment. Obviously, a year ago Wall-Mart went through a change of similar ilk going back to some of the basics that had made them such a strong partner for us. This always happens, it is not unique to the window we are in and that’s one of the powers of the new sales structure we’re putting in place will be to have a single voice accountable for those customers and to be able to anticipate some of those changes such that we can create the most commercial value in the context of their business agenda.

Christopher Ferrara – Bank of America: I guess one last follow-up on that one. Has there been any near term impact on your sales or your share or your positioning at retail in general? Do you project a near-term impact and can you talk about that a little bit which direction that would be in?

Michael B. Polk – President and CEO: Our new selling structure is going to create value for us over time. I talked about two jobs we have done in the company. One, to create more commercial value added what we are bringing to market in the markets where we are, and two, extending our geographic footprint in a disciplined way to the higher growth emerging markets. The change in selling structure we put in place is design to enhance and develop and deliver more commercial value in the markets where we are. So, I expect that structural change to deliver more growth for us over time. The beautiful thing about it is, it comes at a lower costs as a percent of sales, but it elevates our conversation from transactional conversation to reach over to a more strategic conversation by putting one person in one team accountable for the development of our joint businesses. So, I expect positive things to happened over time. We’ve just transitioned to the structure in Q1 and so there’s nothing in our numbers today that show any benefit from that choice, but the future will.

Professional and Baby Businesses

Connie Maneaty – BMO Capital: On Professional and Baby businesses, excluding the contribution from SAP, the pre-buy, can you give us a sense of the contribution from – is it consumption of retailers stocking up on inventory that was driving the sales of those businesses excluding SAP?

Michael B. Polk – President and CEO: Sure, So, it’s good question. Let me start with Baby, because I think that’s the one that’s sort of is most eye opening in terms of the trend shift and there is a number of things going on in that number and I think it’s worth sharing those things with you, so that you can extrapolate forward as you look at how you view our business. Let me give you the headline first on the full year. We expect to deliver growth on Baby in 2012. And as you recall, I said that we are attempting last year to stabilize the business in the second half of 2011, return it to growth in 2012. That agenda is right on track. Importantly, you should not extrapolate Q1’s growth to the full year. About half of the growth is related to timing differences in selling year-over-year, specifically the absence of an inventory liquidation in the prior year period. About half of that is a one-time event that we always had in our numbers, because we knew it was going to happen, that’s not truly underlying performance. The underlying performance though has strengthened over last four to six months. We’ve got low to mid single-digit POS growth on Graco in the U.S., we’ve got strong double-digit growth on Aprica in Asia, and that’s partially offset by continued declines in Europe. What we’re focused on is sustaining the POS growth in the U.S. in partnership with our retailers. We’re looking to extend the tremendous Aprica share and revenue growth we’ve experienced over the last four quarters in Asia. However, I will moderate as we lap the step up that growth rate gross rate will moderate as we lap the step up in Aprica’s performance from last Q2, because this is the fourth consecutive quarter of good Aprica results. So, we don’t fully expect to grow Aprica in Asia for the balance of the year at the same growth rate, but we do expect it to grow nicely, because we’re continuing to build our share position and we’ve got an excellent team there that’s focused on the right things. The offset to that, we expect the problems in Europe to continue until we get our 2013 new items to market, which won’t occur till late 2012. Now, as you recall, we’ve moved the fellow, who is running our Aprica business in Asia to Europe to help us straighten that business out Tom Brown. He has landed and he is getting his arms around it. I think the opportunity might be if we can stabilize Europe before those new items hit, but there’s no sign. I think it would be a bad assumption to build into the core forecast to assume we could do that. The net of all this is, we’d expect to grow lower single-digits in 2012, we’re going to push ourselves to drive towards mid single-digit delivery. I think that’s a stretch as I look at things today, things break our way like Europe stabilization or if the Aprica growth rate in Asia exceeds the growth rate we’ve built in despite lapping the step-up in the year ago period, it’s possible. But the key thing on Baby is to not take the 21% growth and extrapolate forward. You’d overwrite your estimates if you were doing that. On Professional, about 60% of the SAP pre-buy is related to the Professional business and so despite that SAP pre-buy, we’ve got very, very good results and its broad based. This is a very attractive business for my perspective. As you know from our discussions at CAGNY, it falls into the win bigger portfolio roll. This is – win bigger means that it will be our first call on resources whether that’s human capital financial resources. It’s on trend with the move from rural living to urban living in the emerging markets and our opportunities is to take what is a differentiated set of product propositions and brands and a very good selling system, a repeatable model grounded in those three things and deploy it more broadly in the world. So, we will continue to press our Professional business for accelerated performance and the numbers in the first quarter around 10% core sales growth are flatter in part by the SAP pull forward, but that really isn’t what explains the numbers at that level. It’s just good underlying performance and excellent leadership. So, those are the two questions you’ve asked. Of course we have another business in the quarter that is important to talk about and that’s Decor because that actually – while it came in exactly where we thought it would, right on our expectations, it certainly was a down draft in both growth and margin in the quarter. So, excluding Decor, our Consumer segment core growth rates and margins and excluding the SAP pre-buy associated with the other consumer businesses would have been positive as a result of the good results in our Writing businesses, so Decor heard the optics of our performance. The way I look at this is that the Baby one-time benefits of weak competitors in the absence of the inventory liquidation is offset by – sort of washes out against the Decor underperformance. Those two things normalize out as we move forward. We fully expect Decor to make sequential improvement in Q2 and to get back into a normal rhythm of delivering in the second half of ’12. Hopefully that creates a framework for you to look at our Q1 results and build your view forward, those are the key moving parts.

Connie Maneaty – BMO Capital: Just one follow-up. You’ve spoken in the past about an increase in the dividend, I was wondering if there was any better sense of the timing of that event?

Michael B. Polk – President and CEO: Of course, as you recall, we’ve said and are committed to making our payout ratios, our dividend payout ratios more competitive. We said we want to drive our dividend payout ratios to the 30% to 35% range and today we’re sitting right around 20% slightly below. Obviously we need to continue to progress against that commitment. This is of course the Board’s call, not management’s call. There is nothing really that I can see that would get in the way of us taking a step toward that objective that we’ve set in the near-term. I was pleased with the cash delivery in the first quarter. We’re working hard on working capital to drive to improve our cash conversion cycle. We’ve got an eye towards where our leverage metrics will be at the end of 2012. So I have said previously that our ability to take a step toward that dividend payout ratio is not dependent on any unique commitment with respect to leverage metrics or really there is nothing in the way from an earnings perspective of us being able to take a step in that direction. So, it’s simply a matter of timing. I am pleased with Q1, I am pleased with the gross margin delivery in Q1, which gives us breathing room to be able to make that choice and recommendations to the Board and when the Board decides that they are comfortable we will announce a stat.