Newell Rubbermaid (NWL) Q3 2011 Earnings Call October 28, 2011 9:00 am ET Executives Nancy O'Donnell - Vice President of Investor Relations Juan R. Figuereo - Chief Financial Officer and Executive Vice President Michael B. Polk - Chief Executive officer, President, Director and Member of Audit Committee Analysts Budd Bugatch - Raymond James & Associates, Inc., Research Division Christopher Ferrara - BofA Merrill Lynch, Research Division Mark Rupe - Longbow Research LLC William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division Linda Bolton-Weiser - Caris & Company, Inc., Research Division Dara W. Mohsenian - Morgan Stanley, Research Division Jason Gere - RBC Capital Markets, LLC, Research Division Lauren R. Lieberman - Barclays Capital, Research Division William Schmitz - Deutsche Bank AG, Research Division Wendy Nicholson - Citigroup Inc, Research Division Ann Gilpin - Jefferies & Company, Inc., Research Division Constance Marie Maneaty - BMO Capital Markets U.S. Joseph Altobello - Oppenheimer & Co. Inc., Research Division Presentation Operator
Now, before we begin, let me remind you that we will be making forward-looking statements in our presentation today. Actual results could differ materially from those projected and therefore, we direct you to the cautionary statements in the earnings release in our most recent 10-Q. The company undertakes no obligation to update any such statements made today. I'd also like to point out that we will be referring to normalized results and outlook, which are not GAAP measures. We present these non-GAAP information for comparative purposes so that investors may better understand and analyze our ongoing operating trends. For further information on reconciliations to comparable financial measures determined under GAAP, please see today's news release and the additional presentation slides posted at our website, www.newellrubbermaid.com. With that, let me turn it over to Mike Polk for his comments.Michael B. Polk Thank you, Nancy. Good morning, everyone and thank you for joining the call. We have 2 objectives for today, the first and most obvious is to share a solid set of results for Q3 and certainly a step up in our performance from the first half of 2011. The second is to tell you about some changes we're making to simplify our organization for growth. First, let's get into the results. Our third quarter results represent a step up in our sequential sales trend and good business performance across most of our portfolio. Reported net revenue growth was up 5.8%, core sales rose 3.3%. These are competitive levels of growth and represent solid progress over the 0.2% core sales growth we delivered in the first half. Q3 actuals bring our year-to-date core sales into the full year guidance range of 1% to 3%. Q3 normalized EPS was $0.45, up 7.1% versus 2010 and $0.03 above consensus despite $0.01 negative impact in the quarter from the BernzOmatic disposal. Operating income margin was 13.7%, up 20 basis points versus prior year and 40 basis points versus prior quarter. Importantly, we generated strong operating cash flow of $295 million and strengthened our balance sheet by paying down about $229 million worth of debt. Our debt is now the lowest it's been since 2007. Also during the third quarter, we allocated a little over $24 million to repurchase 1.9 million shares under our 3-year, $300 million share buyback program. Those repurchased shares represent about 0.6% of the total shares outstanding. The 20 basis point improvement in operating margin was achieved despite gross margins being below our expectations at 37.4%, 100 basis points below prior year. Our gross margin shortfall was mainly due to resin and source goods inflation and our choice to maintain price competitiveness through targeted promotions in a couple of categories, most notably Rubbermaid Commercial Products, Rubbermaid Consumer products and Everyday Writing instruments.
Maintaining price competitiveness and driving profitable market share growth is essential to unlocking the full growth and value potential in our business. We intend to do that smartly, while being very tough on costs and even more aggressive on productivity. In Q3, productivity mix and pricing were not significant enough to cover what was the peak inflation period in the year. Input cost inflation had a negative 270 basis point impact on gross margin. We actively managed Q3 SG&A to more than offset the gross margin headwinds, clamping down on structural SG&A while continuing to invest in strategic SG&A for growth. Strategic SG&A, as a percentage of sales, was up 80 basis points in the quarter. We expect fourth quarter gross margins to sequentially improve as a result of increased productivity, continued flowthrough of pricing and lower levels of inflation. However, we now anticipate that gross margins on the full year will be flat to down 30 basis points.On the full year, we expect total SG&A as a percentage of sales to be in line with 2010, but strategic SG&A to be up 50 to 75 basis points. All 3 operating groups delivered accelerated year-over-year growth in Q3 versus their first half performance. Tools, Hardware & Commercial Products had another strong quarter, with reported sales up 10.3% and core sales up 7.5%. Office Products delivered reported sales growth of 5.5%, with core sales up 2.2%. Home & Family delivered reported sales growth of 2.9%, with core sales up 1.1%. Five of our global business units delivered core sales growth greater than 5%, with 2 of those 5 growing core sales more than 10%. About 85% of our sales are generated in the developed markets, where our core sales grew about 2%. About 15% of sales are generated in the emerging markets. Core sales grew over 18% in Latin America and nearly 6% in Asia Pacific. Our top 14 brands generate nearly 85% of our revenue. 10 of those top 14 brands grew reported sales over 5% and of these 10, 5 grew over 10%.
As I hope you can tell from the numbers, we're building momentum across most of our portfolio. For our businesses which are primarily professional facing, we have a strong set of results supported by a number of breakout initiatives. For the seventh consecutive quarter, our Industrial Products & Services business grew core sales greater than 10% behind our powerhouse Lenox expand. Our Irwin brand continues to perform well, delivering high single-digit core sales growth behind the tremendous brand-building ultimate Tradesman challenging and this year's Inaugural National Tradesman Day, which recognized and celebrated America's professional tradesmen.Our Rubbermaid Medical Solutions business delivered strong double-digit Core Growth as it continues to build share as the innovation leader in mobile medical parts and mobile electronic medical record solutions for healthcare facilities. Rubbermaid Medical is on track to nearly double its revenue in 2011. In our DYMO office technology unit, our Endicia Internet postage business delivered strong core sales growth of over 25% and gained market share. Endicia processes well over $1 billion of postage annually on behalf of the U.S. Postal Service. For our businesses which are primarily consumer facing, we have some great stories as well. Paper Mate launched a new subline called Ink Joy into Latin America in late Q3 and we're getting great results at sell in as well as sell-through. This innovation will roll out globally over the next 3 to 6 months. Since joining Nowelll Rubbermaid, I've told all the writing folks that my favorite Paper Mate pen is Paper Mate profile but today, I can report that I have a new favorite in its Ink Joy. Ink Joy has the smoothest, easiest write of any everyday pen I've ever used. They leverage a new ultralow viscosity ink technology and nip configuration. On Fine Writing, we continue to build our presence in the emerging markets such as China and Russia with luxury shop-in-shops. In Q4, the Fine Writing team will introduce their most significant innovation in decades, Parker Ingenuity, featuring Parker's proprietary Parker fit technology, which provides an exceptionally smooth and fluid writing experience that actually adjusts to your personal style of writing. You can google Parker Ingenuity in order of these new extraordinary pens today. I bought one online for my wife, Trisha [ph] last week and she is New Jersey tough, as I've told you previously, so I've got to be careful what I bring home as a gift and she absolutely loved it, thankfully. In our strong North American markets, our Calphalon brand delivered their highest U.S. sales quarter, with double-digit core sales growth. We shipped our big distribution win in the quarter with JCPenney, and Calphalon also won share with new products, such as our refreshed contemporary nonstick line, our new contemporary bronze nonstick line and our expanded kitchen electrics offerings. And the Sharpie brand in North America continues to roll, with a 1.6 share point gain in Q3 to about an 82 share of the Markers & Highlighters market behind the start with Sharpie campaign and great merchandising results at back-to-school. Read the rest of this transcript for free on seekingalpha.com