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Edited Transcript of NWL earnings conference call or presentation 2-Aug-19 12:30pm GMT

Q2 2019 Newell Brands Inc Earnings Call

ATLANTA Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Newell Brands Inc earnings conference call or presentation Friday, August 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher H. Peterson

Newell Brands Inc. - Interim CEO, CFO & Executive VP

* Nancy O'Donnell

Newell Brands Inc. - SVP of IR & Corporate Communications

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Conference Call Participants

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* Andrea Faria Teixeira

JP Morgan Chase & Co, Research Division - MD

* Bonnie Lee Herzog

Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst

* Joseph Nicholas Altobello

Raymond James & Associates, Inc., Research Division - MD & Senior Analyst

* Kevin Michael Grundy

Jefferies LLC, Research Division - Senior VP & Equity Analyst

* Lauren Rae Lieberman

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Priya Joy Ohri-Gupta

Barclays Bank PLC, Research Division - Director & Fixed Income Research Analyst

* Rupesh Dhinoj Parikh

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Stephen Robert R. Powers

Deutsche Bank AG, Research Division - Research Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning, and welcome to Newell Brands Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

As a reminder, today's conference is being recorded. A live webcast of this call is available at newellbrands.com on the Investor Relations home page under Events & Presentations.

I will now turn the call over to Nancy O'Donnell, Senior Vice President of Investor Relations. Ms. O'Donnell, you may begin.

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Nancy O'Donnell, Newell Brands Inc. - SVP of IR & Corporate Communications [2]

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Thank you. Good morning, and welcome to Newell Brands 2019 Second Quarter Conference Call. Chris Peterson, our Interim CEO and CFO, will be hosting the call today.

Before we begin, let me remind you that this conference call will include forward-looking statements. These forward-looking statements involve risks and uncertainties, and actual results may differ materially from our expectation. I refer you to cautionary language available in our press release and in our SEC filings that describe these risks.

During the call, we will also use certain non-GAAP financial measures, which we refer to as normalized measures. We believe this supplementary information is useful to investors, although it should not be considered superior to the measures presented in accordance with GAAP. You will find reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in today's earnings release tables as well as on the Investor Relations website and, of course, in the company's SEC filings.

I'll now turn our call over to Chris.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [3]

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Thanks, Nancy, and good morning, everyone. The second quarter results we announced this morning reflect strong progress across all key metrics. We are making decisive and strategic choices to turn the company around and drive shareholder value as we work to transform Newell Brands into the leading next-generation consumer products company.

Results were in line or ahead of our expectations on all key metrics. 4 out of 7 continuing divisions delivered core sales growth in the quarter. We were ahead of plan on operating margins driven by better-than-expected gross margins and lower overhead costs. Productivity and cost controls are taking firm hold and tracking ahead of schedule. Normalized earnings per share benefited from pricing, productivity and mix, in addition to disciplined cost management.

Operating cash flow improved $180 million versus the year ago quarter to positive $191 million, reflecting strong execution on working capital initiatives. While it's still early in the year, the progress we've made to date on the working capital side as well as tax planning initiatives give us the confidence to raise our full year outlook on cash flow from operations.

Before going through the results, I want to provide some context on the progress we're making on the turnaround plan. Over the last few months, we've developed a bold and aggressive turnaround plan focused on 5 priorities: returning the company to profitable core sales growth; improving operating margins through productivity and overhead cost savings; accelerating cash conversion cycle through working capital transformation; strengthening the portfolio of brands and businesses in which we compete; and building a winning team by significantly improving employee engagement.

On the first, focus profitable growth, we are starting to see green shoots across the divisions. We returned to core sales growth in 4 out of 7 divisions this quarter. POS is now growing at our top 4 customers in both Q2 and year-to-date. Our e-commerce business grew high single digits in the second quarter, and we returned to core sales growth in the international business. We've got more work to do to expand the success across the broader range of customers and categories, but we're encouraged by the progress we're making.

To win today in a fast-moving omnichannel world, it is critical to engage the consumer at all moments that matter in the path to purchase, and omnichannel marketing is a crucial link in that journey. To that end, we have undertaken a concerted effort to retool marketing and build out our social and digital marketing capability, creating a digital-first mindset. For example, among other things, we've now created a social and influencer marketing playbook and increased influencer marketing spend 4x versus 2018, with 30 influencer events planned for the back half of the year. We think these initiatives will be additive to our efforts to improve purchase intent for our products.

On our second strategic priority, optimizing the cost structure, we are executing on a number of cost reduction and simplification initiatives. For example, during the first half of the year, we took out more than 12,000 SKUs across the organization, or about 13%, with concrete plans in place to get to the 50% target by the end of next year. We've also made good progress on moving obsolete inventory, which helps both our working capital and SKU reduction efforts. Over the past several months, we've successfully implemented 3 SAP conversions: the U.S. Fresh Preserving business; the Coleman business in Australia and New Zealand; and the Appliances & Cookware business in EMEA. We have another SAP conversion scheduled to go live in Appliance & Cookware in Asia shortly. Next year, we'll tackle the remaining 6 implementations. And by the end of next year, more than 95% of the company's sales are expected to be on 2 ERP systems.

We continue to make progress on reducing systems complexity and standardizing systems across the organization. We are on track to cut IT business applications by 85% by the end of next year as we remove redundancy, simplify the IT footprint and reduce costs.

We also implemented a new e-commerce digital technology strategy through which we are consolidating over 12 different architectures into a single new technology stack with superior capabilities and new tools to support the marketing reinvention effort. As part of this process, we've made significant headway in rationalizing the number of sites that we have with the goal of converting the sites for the vast majority of the company's brands toward being more focused on showcasing new product innovation and brand storytelling rather than highly discounted commerce and fulfillment sites. This approach provides significant cost and complexity reduction and a better experience for consumers.

We are also taking steps to simplify the supply chain. During the second quarter, we announced the closing of 3 manufacturing plants and 10 distribution centers, representing an 8% reduction in the company's supply chain footprint.

Driving improvement in our cash conversion cycle is our third strategic priority. We took strategic actions to accelerate the company's cash conversion cycle, which culminated in a stronger-than-planned cash flow delivery this quarter. On accounts receivable, we entered into a more cost-effective program for accelerating receipt of payments, and we improved customer terms compliance by strengthening the company's deduction resolution process, thus clearing customer deductions faster.

On the payables front, our procurement team has renegotiated contracts with hundreds of our top suppliers and have extended payment terms for more than 2,000 of our smaller suppliers to benchmark levels, which, in total, represent roughly 1/3 of the company's spend. Negotiations with strategic suppliers continue to take place. As -- and as mentioned, the progress made on SKU reduction benefits inventory management.

Relating to our goal of strengthening the portfolio, the company closed on the Process Solutions and Rexair transactions in the second quarter and entered into a definitive agreement to sell the U.S. Playing Cards to Cartamundi Group with that transaction expected to close in the second half of the year. Utilizing proceeds from the completed divestitures, the company reduced net debt by $777 million in the second quarter.

We also announced an update to our divestiture program this morning. Following an in-depth review, the company has decided to keep the Rubbermaid Commercial Products business. As I was able to learn more about this business and spend time with the team, I have a strong conviction that RCP will create more value as part of our ongoing portfolio. The Commercial business has a leading competitive position across attractive, large and growing categories, and the RCP brand commands one of the highest perceived quality scores in Newell's portfolio. It's responsive to branding and innovation, with product differentiation being a key driver of success. It generates strong cash flow, with margins that are accretive to the total company average, and it is accretive to both earnings per share and cash flow in 2020 and beyond.

We still plan to pursue divestitures of Mapa/Spontex and Quickie, and we expect to be in a position to close those transactions by the end of this year, at which point the Accelerated Transformation Plan will be complete.

We currently project that the remaining divestitures that are yet to be completed will generate between $675 million and $775 million in after-tax proceeds. All divestiture proceeds generated in 2019 will be directed toward debt paydown as we are prioritizing strengthening the balance sheet and maintaining our investment-grade rating.

As a result of our decision to keep RCP, we now expect to attain a gross debt to EBITDA leverage ratio of less than 4x by the end of this year and reach 3.5x by the end of 2020. We have spoken to the rating agencies about this change and shared with them the strategic rationale for the decision as well as the financial ramifications. In our view, with the RCP business being accretive to margins, earnings per share and cash flow, the decision to keep the business strengthens the company for the mid- to long term.

And lastly, but perhaps most importantly, we are focused on building the team and reigniting employee engagement. The senior leadership team has become more visible and connected with the organization through a number of face-to-face meetings, global town halls, webcasts and video communications and through our employee app. As a result of these efforts, and of the excitement generated by early signs of the turnaround taking hold, employee sentiment is improving. Based on our tracking of internal feedback, employee engagement has increased between 25% and 40% versus the year ago period on certain key measures, such as confidence in leadership and the future of Newell. There is more work to do here, too, but this type of progress is encouraging.

On this engagement front, we made a strategic announcement this morning that we have decided to move the corporate headquarters to Atlanta. 3 of our 7 operating divisions, Writing, Baby and Food, representing over half of the company's profits, are based in Atlanta today, with approximately 1,100 professional employees located there. I see a significant value in moving the executive management team closer to the business as we endeavor to improve operating performance. In addition, I believe working in closer physical proximity will promote better teamwork and communication and provide more opportunities for career advancement for our people. The move generates overhead cost savings, although that is not the primary driver of the decision. We will be transitioning to the new headquarters over the next few months and look forward to hosting many of you in Atlanta in 2020.

Earlier this week, the company announced that the Board has appointed Ravi Saligram as Newell Brands' new CEO and Board member effective October 2. I assume you've all had the opportunity to read the release, so I won't take time today to walk through the details of his impressive resume. I will comment that I've met Ravi, and we've had multiple conversations since. My remit during the transition is to continue to drive forward with the transformation of our business with a focus on the 5 priorities I shared earlier. My conversations with Ravi and the Board have all been supportive of those goals. I look forward to partnering with Ravi and the rest of the leadership team to further our transformation agenda and drive value creation.

Let me turn now to a detailed review of our Q2 financial results. Net sales from continuing operations declined 3.9% versus last year to $2.1 billion, reflecting a nearly 2% headwind from foreign exchange, the closing of more than 70 Yankee Candle retail stores year-to-date and a 1.1% decline in core sales, which was in line with our outlook. With 4 out of 7 divisions growing in Q2, including Writing, Baby, Home Fragrance and Connected Home & Security, we are pleased with the sequential progress the team is delivering.

Productivity, price increases and mix more than offset the negative impact of inflation, tariffs and foreign exchange, driving a 50 basis point improvement and normalized gross margin to 35.6%. In recent months, the company has significantly ramped up its efforts surrounding productivity, with the funnel of projects up 33% versus year ago and continuing to build.

Overhead costs were down 110 basis points versus year ago driven by tight cost controls and restructuring actions. Strong gross margin performance, in combination with a meaningful reduction in overheads, drove 160 basis point improvement and normalized operating margin to 11.3%, which was ahead of our plan.

We are moving quickly to drive the turnaround of Newell Brands and optimize the cost structure with progress evident in the first half results and additional work streams underway. Debt paydown over the past year resulted in net interest expense savings of $42 million versus last year. The normalized tax rate was 25.4%. Normalized net income from discontinued operations was $69 million, below $282 million in the year ago quarter, reflecting lost contribution from 7 completed divestitures, which included the Waddington, Rawlings, Goody, Pure Fishing, Jostens, Process Solutions and Rexair businesses.

At the end of Q2, we had 424 million diluted shares. The company delivered normalized diluted earnings per share of $0.45, which was ahead of our guidance range due to better-than-expected operational performance. Normalized diluted earnings per share from continuing operations increased 45% versus year-over-year to $0.29.

Now on to segment results. Core sales for the Learning & Development segment grew 3.5%. Core sales growth was broad based as Baby returned to growth this quarter having fully lapped the disruptions stemming from the TRU bankruptcy. The team has reenergized and focused on sustaining this momentum, with exciting new product launches hitting the shelves, including a full relaunch of the iconic Baby Jogger City Mini platform.

The Writing division maintained its core sales growth momentum. Our Back-to-School sell-in shipped slightly earlier than expected, in line with the timing of last year. We think our brands are well positioned to win during the Back-to-School season. This division is among our first adopters of the marketing pivot toward influencers with exciting activity planned in the coming weeks and months.

Core sales for the Food & Appliances segment declined 7.1%. As anticipated, the Food division was negatively impacted by the shift of orders on the Fresh Preserving business into the first quarter, ahead of the April 1 implementation of SAP. The Appliances & Cookware division remained under pressure. Although we are seeing some traction in terms of POS and share development from recent new product activity, including the refresh of the Mr. Coffee line, we need to broaden the innovation pipeline across the entire portfolio, which will take some time.

Core sales for the Home & Outdoor Living segment were down 1.1%. The Home Fragrance business reached an important inflection point and returned to core sales growth driven by strong performance in EMEA and distribution gains for WoodWick across a number of retailers. The Connected Home & Security division maintained its growth momentum. Core sales for the Outdoor & Rec division were down year-over-year, but now that the business has lapped major distribution losses, we are starting to see a sequential improvement in share trends as well as in POS.

Moving on to cash flow. The company maintained the momentum from the first quarter and generated operating cash flow of $191 million, an increase of $180 million year-over-year and ahead of plan. This improvement reflects benefits from the strategic actions taken to improve working capital, including negotiation of more favorable payment terms as well as a decrease in receivables. Year-to-date, operating cash flow is $380 million better than a year ago. As we have stated previously, we are still in early innings of working capital transformation and continue to see significant opportunity ahead in unlocking the cash generative power of the company.

Let's now turn to guidance. First, let's talk about what changed in our 2018 base year results. In the press release, we have provided supplemental information, which shows the impact of including RCP in continuing operations for Q3 and full year 2018. As you can see, that change is accretive to net sales and operating margin, but has a slight negative impact on normalized EPS. Moving the RCP business from discontinued operations to continuing operations requires the company to restart depreciation expense because, in accordance with GAAP, assets held for sale are not depreciated. The depreciation expense for RCP is approximately $35 million on an annualized basis or $0.06 per share. The move has no impact on operating cash flow. Our updated outlook for Q3 and full year 2019 will be based on a comparison with the metrics in the supplemental schedule. As for our outlook for Q3 and full year 2019, we will report RCP as a part of continuing operations beginning in the third quarter. Our revised guidance reflects the incremental annualized noncash depreciation expense of approximately $35 million for RCP. Our previous guidance did not include this expense. With that frame of reference, I'll walk through our updated outlook for Q3 and full year results.

For 2019, the company expects to deliver net sales of approximately $9.1 billion to $9.3 billion, reflecting a low single-digit decrease in core sales growth and a roughly 150 basis points headwind from foreign exchange.

Normalized operating margin is expected to grow 20 to 60 basis points year-over-year to 10.4% to 10.8%. This outlook continues to assume that price increases, productivity and a reduction in overhead cost offset the unfavorable impact from inflation, tariffs and currency, while simultaneously funding additional A&P investment.

We expect a normalized effective tax rate for continuing operations in the low double-digit range and normalized diluted earnings per share for the total company between $1.50 and $1.65. Other than the incremental depreciation expense, there is no additional impact on EPS from the decision to retain the RCP business, as we had previously assumed it would be sold at the end of the year. So in effect, we are increasing our pretax income guidance on the underlying business by about $35 million to offset the incremental noncash depreciation expense. This outlook assumes no share repurchases in 2019.

We are raising our forecast for cash flow from operations by $300 million to a range of $600 million to $800 million, reflecting better-than-anticipated progress on the working capital side as well as anticipated benefits from additional tax planning initiatives. This updated forecast includes approximately $50 million in cash taxes and divestiture-related transaction costs and about $200 million of restructuring and related cash costs.

As we look to the third quarter, we currently expect net sales in the $2.42 billion to $2.47 billion range, with core sales declining 2% to 4% and a nearly 100 basis point drag from currency. This is in line with our annual guidance and reflects a sequential improvement from the first half of the year in 2-year stack core sales growth trends. We have planned for 100 to 130 basis point year-over-year decline and normalized operating margin to 11.9% to 12.2% as a significant ramp-up in A&P spending in Q3 will more than offset sustained progress on overheads.

The normalized effective tax benefit for continuing operations is estimated in the high single-digit percentage range, reflecting expected discrete tax benefits. This yields normalized diluted earnings per share for the total company within a $0.55 to $0.60 range with the diluted share count that's similar to Q2.

In closing, we are encouraged by the broad progress the organization is making toward transforming Newell Brands into the leading next-generation consumer products company. We remain steadfast in our ambition to drive shareholder value creation to a return to core sales growth ahead of industry averages, operating margin expansion and an improved cash conversion cycle. We are on track to complete the divestiture program by year-end. We expect to deliver sequentially improved core sales and operating margin results versus 2018, while overcoming significant external headwinds from inflation, tariffs and foreign exchange, and simultaneously continuing to support the company's brands and innovation in the marketplace. We are also taking concerted steps to strengthening the company's working capital metrics and drive operational discipline across the organization. I'm encouraged by the early progress and excited about the opportunity before us.

With that, I'll turn it over to the operator to begin Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Bill Chappell with SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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First, welcome back to Atlanta. I'm not sure New Jersey has been great for your stock price, so I think much better coming back to Georgia.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [3]

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Thanks.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Second, just a little bit more around Rubbermaid Commercial decision and just trying to understand. I thought, over the past, I guess, 1 year, 1.5 years, part of the reason why it is taking longer to actually sell was it had to be split off, you had to do a lot of work to kind of carve it out. And so didn't know if there -- you now have to reverse engineer, bring it back within the organization. And also little bit more thoughts on was it just you weren't seeing offers that were of the right value or you really felt like this was an integrated part of a -- the rest of -- which is more a consumer-facing business.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [5]

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Yes. Let me try to provide a little bit more perspective on the decision. So the Rubbermaid Commercial Products division, as I mentioned, is one of our strongest businesses. If you look at the brand equity scores, the Rubbermaid brand is in the top 3 of the company's brands relative to the perception quality scores with consumers. It was always slated as part of the ATP plan to be one of the last divestitures that the company marketed. And in fact, the company never started really the marketing effort for the RCP business, so we didn't take it to market. The good news about it is as we got into it, because it's a strong business that generates strong operating margins, strong cash flow, we believe that keeping it in the portfolio is going to drive significant value creation.

Let me just provide a couple of statistics. So what you can see from our updated guidance is that keeping the RCP business improves the operating margin of the company for 2019 by 110 basis points, which is driving the improvement in our operating margin guidance. Additionally, if you look at the implied guidance for continuing operations, keeping the RCP business in the portfolio drives our earnings per share from continuing operations for 2019 up by almost 40%. So it is a huge improvement in the underlying earnings per share from continuing operations to keep the business versus sell the business.

We never got fully started on the separation activities, and so we believe that the -- just that the -- now that we've made the decision to keep the business, we think there's some opportunity to drive additional cost savings in the -- primarily in the supply chain of that business, but it will eliminate the need for us to do a lot of separation work that we would have had to do if we continue down the path of selling the business.

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Operator [6]

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Your next question is from Andrea Teixeira with JPMorgan.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [7]

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So my question, just following up to Bill's question on Rubbermaid Commercial. So what is the run rate? I'm assuming that, obviously, the top line was not attractive and besides the fact that it's not consumer-facing. I get the point about margins, obviously, but what is the top line growth as we stand right now and where you think you can take it? And if you can give us like you gave -- could you give a good, like, sense of what's happening at the Appliances business, but where you're going to think that you can reinvest part of this margin into the business and where you think we can see stabilization of the trends on the top line for that one?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [8]

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Yes. So moving the Rubbermaid Commercial business back into continuing operations, we've kept our guidance for core sales growth for 2019 the same, so it doesn't really have an impact on the core sales growth guidance for the company. Our guidance at the beginning of the year was for core sales to be down low single digits. Now that we're including it in core sales, we're maintaining that guidance of down low single digits. So we don't see the decision to include Rubbermaid Commercial back into continued operations having a material impact.

That being said, within the Rubbermaid Commercial Products business, there's really 2 different businesses. There's a commercial business, which represents about 2/3 of the business that has been growing over the last number of years at or above the rate of GDP, and that's the business that is very strong, very profitable and we see strong growth prospects going forward for.

There's also a smaller part of the business that's a consumer-facing business focused on outdoor and garage and refuse. And that part of the business is a lower-profit margin business that we've been focusing on rightsizing, and I think we've made very good progress there. And so I think that, as we look forward, we think that there's still some optimization work on the consumer part of the business, but I think we feel like we can drive that business back to growth in the relatively short time frame here once we get through that rightsizing activity on RCP.

Relative to reinvesting back in the business, I think I mentioned in the prepared remarks that we're guiding the third quarter margin down versus year ago by 100 to 130 basis points for the total company, and that really is entirely due to an increase that we're planning in the third quarter in advertising and promotion spending. In -- and the third quarter, as you know, is a big quarter for us from a seasonality perspective because you still have the businesses that are summer seasonal in the third quarter. You have the Back-to-School period in the third quarter. And so the ramp-up that we have versus year ago in advertising and promotion spending is focused on our strongest businesses. We're planning to increase advertising and promotion spending in the third quarter against our Writing business, against our Outdoor & Rec business and against a number of our other businesses where we have strong innovation momentum and to keep the core sales growth trend going in those businesses.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [9]

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And just to be clear because this is very helpful, the 100 bps increase over a year ago is relative to the base that is already including -- so it's fully comparable, including commercial RCP back, right?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [10]

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Correct. So if you look at the guidance chart that we put in the press release, what you can see is that we've increased the guidance range for the full year 2019 versus 2018 by 110 basis points, and that 110 basis point increases entirely due to including the RCP business. And what we've done is we've included that fully in both years, including -- and the normalized impact of the annual depreciation expense in both years. So it's an apples-to-apples comparison.

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Operator [11]

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Your next question is from Lauren Lieberman with Barclays.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [12]

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I'm sorry to go back at the Commercial Products question, but I -- one of the things that was cited in the decision to include that business in the divestitures had been the notion of complexity of the portfolio. And that -- and of course, when that was said, it was certainly a change in course. So I just wanted to know if you could comment on how you're thinking about portfolio complexity and having this sort of standalone industrial-facing business versus the resident, so solidly consumer-facing.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [13]

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Yes. So we've looked at the complexity reduction. And interestingly, keeping the Rubbermaid Commercial Products business doesn't significantly change the complexity reduction metrics that were previously shared. And part of the reason for that is because the Rubbermaid Commercial business is already relatively integrated from a supply chain standpoint with the Rubbermaid Consumer business that the company was planning to keep. And so selling the Rubbermaid Commercial business would actually require a separation activity that would have, in some cases, added more complexity during that period. So if you look at the premise of the original ATP plan in terms of SKU count reduction, manufacturing footprint reduction, exposure to resin, the decision to keep the Rubbermaid Commercial business really doesn't change the picture with regard to any of the complexity reduction metrics.

Relative to a -- the question on the commercial-facing part of the business, I think, as I've gotten into it and looked at the business, the thing that I was looking at was the Rubbermaid brand plays across both commercial and consumer-facing businesses. And if you include our Food business in that, the Rubbermaid brand is probably 50-50 between commercial and consumer-facing businesses. And the Rubbermaid brand is -- in driving branding and innovation applies equally and is a critical skill that's required in both the commercial business and the consumer business. So we think that the fit with our core competencies is very strong across the entire Rubbermaid businesses.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [14]

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Okay. And if I can squeeze in one more, just the retail closures. There's, obviously, a lot of ongoing movement in the brick-and-mortar landscape, and so questions around that in J.C. Penney. So how are you thinking about that in terms of impact on whether it's your building in things for this year, plus your planning ahead for 2020 and, maybe in particular, how you might be approaching the planning cycle differently today than what might have been done at the company previously given this sort of, let's call it, ongoing -- the changes in landscape?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [15]

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Yes. It's a good question, and it's something that we are very focused on. And so I think one of the things that's very encouraging about the results in the second quarter is that if you look at the company's top 4 customers, we're back to point-of-sale growth in the second quarter and year-to-date in all 4 of those customers, which, we believe, are winning customers in the retail environment that is being radically disrupted with digital and e-commerce shopping trends. We also are excited that we're back to high single-digit growth in the e-commerce business and that we're back to core sales growth in the international business. And so the way we're thinking about the business is very much planning for the retail disruption to continue. My view is that we need to be thinking about where the retail environment is going to be over the next 3 to 5 years and then making our investment choices, so that we're playing to win where the market is going to be. And so our strategy is to invest in winning customers, to invest in digital and e-commerce, to invest in growing the international business and to manage appropriately the decline in retailers that, unfortunately, are being disrupted and losing share in the marketplace.

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Operator [16]

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Your next question is from Steve Powers with Deutsche Bank.

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Stephen Robert R. Powers, Deutsche Bank AG, Research Division - Research Analyst [17]

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Maybe just to round out the RCP discussion. When you parse out all the moving parts, are you able to isolate at all what portion of the updated $600 million to $800 million in operating cash flow you can now attribute to continuing ops, inclusive of RCP? I know you've historically been reluctant to provide that information, but I'm just hoping we can revisit it because I do think it's important to understand the go-forward cash earnings power.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [18]

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So first of all -- let me answer the first and then we'll come back to the second. So first of all, the increase in the cash flow guidance of $300 million is not impacted at all by the decision to keep the RCP business because the operating cash flow guidance for the company is a total company operating cash flow. So really, what's driving the $300 million increase in the guidance range from what was $300 million to $500 million to now $600 million to $800 million in operating cash flow is strong results on working capital management, which is much stronger than what we anticipated as we've gotten into it and started to drive the strategic actions that I've talked about and better tax planning. So the guidance increase is really based on underlying performance of the business is the first point.

Secondly, the decision to keep the RCP business will significant (technical difficulty) the cash because the RCP business is a very strong cash-generating business and a very strong operating margin business. So I mentioned earlier that keeping the RCP business in the -- if you do the implied guidance increases the earnings per share from continuing operations in 2019 by almost 40%, and that flows through to cash flow. So I'm expecting that our 2020 cash flow will be significantly enhanced by the decision to keep the RCP business.

It's hard to parse out exactly what the operating cash flow in 2019 is from continuing operations versus discontinued operations. But now that we've made the decision to keep the RCP business, I think the discontinued operation impact on operating cash flow for the businesses that are being sold this year is not as significant as what it was planning to be before the decision to sell the RCP business.

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Stephen Robert R. Powers, Deutsche Bank AG, Research Division - Research Analyst [19]

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Okay. That's great color. And then the second question was just on the move -- the headquarter move. Could you comment at a high level about how many people and what functions you have today in New Jersey and other locations that will be impacted and consolidated into Atlanta? And then just sort of -- just a feel for how confident you are that you can retain key personnel as you make that transition.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [20]

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Yes. So the company has about 1,100 professional employees in Atlanta today, including most of the corporate employees are already based in Atlanta. In New Jersey, the company has about just under 100 corporate employees that will be affected by the move, so there's about -- a little less than 100 roles that will be moving from New Jersey to Atlanta. Additionally, in New Jersey, we have about 200 roles in the e-commerce division and the plan is to keep the e-commerce employees in Hoboken because we believe this is a good market for e-commerce and digital talent. And so, really, it's less than 100 people that will be moving to Atlanta -- or 100 roles that will be moving to Atlanta. We've gone through, as you might imagine, a very specific exercise looking at the roles that will be impacted, the people in the roles, and we believe we've got a strong plan to manage the transition without any disruption to the business.

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Operator [21]

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Your next question is from Priya Ohri-Gupta with Barclays.

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Priya Joy Ohri-Gupta, Barclays Bank PLC, Research Division - Director & Fixed Income Research Analyst [22]

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Chris, really appreciate the commentary around sort of your desire to maintain IG ratings and the focus on debt paydown. As you've spoken with the rating agencies, would you be able to share sort of their perspective on the plan and whether they're onboard with this being commensurate with the current rating? And if they're not, how could that potentially affect, if at all, plans for future debt paydown and shareholder return?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [23]

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Sure. Yes, so I mentioned that we've -- I met with both S&P and Moody's last week to take them through the revised plan on keeping the RCP business and the revised projections for the company. And effectively, what we've talked about was the strong cash generation that we're having in the core business and the fact that we're taking our cash guidance up for the year, the fact that we're keeping the RCP business, which has a short-term increase in the gross debt to EBITDA, where I mentioned that we expect to be at or below 4x at the end of this year, but we're -- but we believe we've got a plan to be below 3.5 by the end of next year. And we talked about the -- how the company is better positioned and strengthened going forward by keeping the RCP business. I'm not going to speak for where they came out, but I'm expecting that both of them will publish an update note, either today or Monday, with their conclusion from it. But I will say that we had very good meetings, and the meetings were very productive.

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Priya Joy Ohri-Gupta, Barclays Bank PLC, Research Division - Director & Fixed Income Research Analyst [24]

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That's helpful. And I guess just one housekeeping item on the cash flow benefit from better tax planning. Would you be able to quantify how much of the $300 million increase is contributed to that and whether we should anticipate that as something that gets built into the base going forward? Or is it a onetime benefit?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [25]

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Yes. So of the $300 million increase, it's about half that's coming from tax planning and about half that's coming from working capital management improvement. And so one of the things that you'll see on our guidance is we've also taken down the guidance that we had given previously where we said we expected to pay about $200 million in cash taxes and divestiture-related fees this year to a number that's more like $50 million. And so that's driving about half of the benefit as tax planning and about half as working capital management.

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Operator [26]

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Your next question is from Joe Altobello with Raymond James.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [27]

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So I guess first question on RCP. It looks like that business did about $1 billion in sales last year. You raised the sales guidance this year by $900 million. So are sales down in that business 10%? And if that's the case, and 2/3 of the business is growing, that seems to imply the consumer piece is declining pretty rapidly, if my math is correct.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [28]

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Yes. So sales in that business are not down 10%. I think that when we did our guidance range, we only guided the year to a single decimal point, not the 2 decimal points. So some of that is in the rounding. So the business is down slightly this year. But as you can see from our core sales growth guidance, we're not changing our core sales growth guidance for the year by including the RCP business. So it's pretty much in line with the balance of the portfolio.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [29]

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Okay. That's helpful. And then in terms of the third quarter guide, core sales trends are implied to get worse, down 2% to 4% versus down 1%, call it, for the second quarter. And this is despite the fact that A&P is ramping up. So maybe give us a little more color on why you think core sales trends decelerate in the third quarter.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [30]

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Yes. So I look at it as core sales trends are accelerating in the third quarter. And the way I look at it is on a 2-year stack basis. And if you look at the core sales growth trends on a 2-year stack basis, the third quarter is improving versus the second quarter by 400 basis points in terms of core sales growth trends on a 2-year stack basis. It's also very much in line with our plan for the year. So the minus 2% to 4% that we're planning in Q3 fits very well in our guidance range, which we're not changing for the year of down low single digits. So I think we're being appropriately prudent in our planning, but this is very much in line with our plan. And we think that it represents a sequential improvement in terms of the underlying performance given the base period dynamics.

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Operator [31]

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Your next question is from Kevin Grundy with Jefferies.

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Kevin Michael Grundy, Jefferies LLC, Research Division - Senior VP & Equity Analyst [32]

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First a housekeeping question, then a broader question on the incoming CEO. So the housekeeping question is in the Learning & Development segment. Was there any timing benefit with respect to Back-to-School there cycling and equally as easy comp, I guess, so that looked a lot better? And then sort of tying that in with the core sales guidance, that probably looks a little bit worse than folks had expected. Was there any Back-to-School shift there that ended up in Q2 instead of Q3? So that's the housekeeping question. Then the broader question, Chris, would just be with respect to Ravi coming in, how involved, if at all, were you in the interview process? What do you think Ravi will bring? And why do you think the Board believes he's the right leader for the company at this point in time? And then I think what would be helpful just maybe to put some context on a time line for investors. As he starts in the fall, can we expect sort of a long-term strategy to be detailed for the company on the fourth quarter call or perhaps down at CAGNY in February? So any context with those questions would help.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [33]

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Very good. So let me start with the housekeeping question. So on the Back-to-School ship-in from -- on Writing, we did ship in slightly better than what we expected in Q2 versus when we gave the original guidance for Q2, slightly earlier, but not significantly. And so it wound up being about in line with what we did in the year ago period. So there was not a significant impact of Q2 this year versus last year, but it was a little bit better than we had expected when we entered the second quarter. As a result of that, there's not really a material difference in Q3. So we -- I mentioned on the call that we had turned the corner on 4 of our 7 continuing divisions with Baby, Writing, Connected Home and Home Fragrances all delivering core sales growth in the quarter. And I think we feel good about those 4 businesses continuing on a positive trajectory going forward, on the housekeeping question.

With regard to Ravi, I've met Ravi and I've talked with him a couple of times since meeting him. Obviously, the decision to hire the CEO was the Board's decision. But I'm very much looking forward to partnering and working with Ravi when he starts in October. And in the meantime, I've talked with both the Board and with Ravi about the 5 priorities as part of our turnaround plan. And the Board and Ravi are both very supportive of continuing the effort and moving full speed ahead with our 5 priority efforts.

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Operator [34]

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Your next question is from Bonnie Herzog with Wells Fargo.

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Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [35]

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I wanted to ask you about Yankee, specifically, same-store sales trends. Did -- and then did the results in Home Fragrance sequentially improved in Q2 or -- as you expected? And then on the store closures, how has that been progressing in terms of your expectations? And wondering what you're seeing in terms of conversion there. And then finally, just love to get your long-term outlook for that business and if it's changed at all.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [36]

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Yes. Okay. So the Home Fragrance business, I feel like we've made an important change in the inflection of that business for the positive, and so let me try to just provide a little bit about what's happening and where we're headed in that business. So we continued down the path of closing unprofitable retail stores, so that we rightsize the retail portfolio. And generally, we're closing stores as their leases expire. We don't expect to fully get out of the retail business, but we expect to downsize the retail footprint over time. And you see, year-to-date, we've closed I think 78 stores in the first half of the year.

The comp sales trends of those retail stores continue to decline broadly, but the rate of decline has slowed down because we put an aggressive effort at trying to drive better traffic-driving initiatives, better conversion and effort at driving increase in average unit retail prices at the retail outlets that's starting to gain some traction.

That being said, the more important part of the business is what we're doing relative to the part of the business that we're selling through retail customers, which is going very well. And so we've partnered with Walmart and launched the WoodWick brand in Walmart. Our business at Walmart is up strong double digits. The category is growing strong double digits. The WoodWick brand in Walmart is leading in overall trade-up in the category. And what's happening is as we -- as we're pivoting to more of a wholesale business, the wholesale growth is outstripping and outpacing the decline we're seeing in the retail business. And the retail business, as we're closing the unprofitable stores, is becoming a smaller part of the business. So we're very encouraged by the trends we're seeing, and we think we see a bright future for that business as we pivot back to offering great products where the consumer shops.

The other important thing in that business is that we've gotten our European business back to growth. And so the European business went through a period where it needed to reset, and I think we're on a good trajectory in that business driving growth broadly across the international markets.

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Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [37]

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All right. That was helpful. And if I may, I just wanted to ask about your Nielsen trends, which really appeared to have fallen off a cliff in the last couple of months. So I certainly understand that Nielsen doesn't capture a big part of your business. But what's going on in these track channels, especially in categories that are weakening, like Appliances, Writing and then Food, Beverage storage containers?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [38]

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Yes. So Nielsen only covers about 20% of our business, so 80% of our business is not captured by Nielsen. And I think what's important to understand about Nielsen is Nielsen misses a lot of the parts of our business that are growing disproportionately fast. So I mentioned that we're growing our e-commerce business high single digits in the second quarter. And within that, we've got some customers that are growing strong double digits that are not picked up by Nielsen. So I think part of what's happening is as the consumer is shifting to purchase more online and as we are disproportionately investing in winning customers and winning channels, I think that the Nielsen results are less predictive of the company's total results than, perhaps, what they were in the past. So we certainly look at the Nielsen results. But I think given that it's only 20% of the business, we're focused on the broader part of the business that is in the winning customers and channels.

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Operator [39]

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The next question is from Rupesh Parikh with Oppenheimer.

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Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [40]

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So just given some of the -- I guess, some of the tariff news yesterday, just curious if you have any initial thoughts on the impact of Newell, whether any of this has been incorporated in your thinking for this year.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [41]

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Yes. So it's hard -- it's a little bit hard to react to a tweet. And we don't know a lot about it yet because the USTR office hasn't come out, unless that's happened while we're on the call here this morning, with the specificity. And just to give a little bit of color. We don't know is it based on when the products are exported from China or when they're imported from China, and that has a difference of about a month in terms of when the effective date goes in. We don't know which categories are covered and which categories are not covered, and are there any things that are excluded. And we've had lots of discussions with Congress about excluding parts of our portfolio from tariffs, particularly the Baby products where it's a child safety issue. That being said, under almost any scenario, we don't see the tariffs as having a material impact to this year's numbers because of the timing of what they would be -- of when they would be put into effect. So even if it was the worst case scenario from a timing standpoint and it covered all of the company's categories and at the 10% level, given the amount of inventory we have in the U.S. and the focus we've got on mitigating actions, including asking suppliers to help cover some of the cost and taking pricing, we don't believe it's a material impact to the company this year.

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Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [42]

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Okay. Great. And then I mean if it does go into effect, any sense in terms of how to think about the exposure next year or if there's any color you can provide in terms of your current exposure?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [43]

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Yes. I think it's premature to do that just because we -- given the amount of uncertainty with -- which categories it would cover, what the amounts are, how it will be implemented, I think it's premature. So we certainly will provide that as the rules get clearer. We also are starting our budgeting process shortly here in the next month or so for the planning process for next year. And so anything that gets put into place, we would incorporate into that planning process. But it's premature to speculate on the impact for next year and going forward.

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Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [44]

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Okay. And my last question on tariffs. So I know you've taken some actions on pricing year-to-date. So just curious how those actions had played out versus your expectations.

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [45]

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Yes. So generally, pretty well. So you can see from the results in the second quarter that pricing and productivity more than offset the impact of tariffs, inflation and FX and allowed us to grow our gross margin by 50 basis points versus year ago. The most recent set of tariffs that went into effect in May took the List 3 product tariffs from 10% to 25%. We've taken pricing actions now across all of the businesses that were affected from that. And generally, the discussions with the retailers have gone well in terms of getting price acceptance from the retailers. It's a little bit premature to say what the consumer reaction is because many of those price increases didn't go into effect until the end of the second quarter. But what we are seeing is, generally, where we're impacted by pricing, it's not in every case. But most cases, our competitors were also impacted by the tariffs. And so there's a desire for the industry to price recover for that. So it doesn't create a competitive advantage or disadvantage for anybody over the medium term.

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Operator [46]

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And we have time for one last question, which will be from Olivia Tong with Bank of America.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [47]

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Want to talk a little bit more about margins. You've explained the SG&A with all the incremental advertising, but gross margin was a big swing, negative to positive this quarter. Can you unpack that a little bit and then sort of give a little bit of color into what the second half looks like on gross margin?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [48]

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Yes. So on gross margin, we put a very concerted effort in improving our gross margins. And the things that we're working on are reducing the company SKU count. We've now reduced -- when I presented at CAGNY, I said that at the beginning of the year, we had 90,000 SKUs in the continuing operations business. We've already taken 12,000 SKUs out, and we're down to 78,000. And so we've made a big improvement there. We also have announced that we're closing 3 manufacturing plants and 10 distribution centers. And so we're starting to make effort -- progress on our consolidation of our supply chain footprint, and we're focused on gross productivity. And the productivity work that the company has done and is doing is really starting to pay dividends. And so if you look at productivity as a percent of our cost of goods sold, the productivity results for this year, I expect, will be the best that the company has had in recent history. And if you look at the productivity funnel this year at this point for next year versus where we were last year at this time, our productivity funnel for next year is up 33% versus where our productivity funnel was last year at this time for this year.

So I think we're making very strong progress there. I think that the underlying operating progress that we're making on driving gross margin higher is being somewhat masked by the impact of foreign exchange and tariffs and commodity inflation, and that -- those impacts will be variable by quarter. But the trajectory on the underlying operating progress on gross margin is very strong, and I expect it to continue.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [49]

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Got it. On the portfolio decisions that you've made, was it just a like look at Rubbermaid Commercial? Or did you have a look at the rest of your business, the entire portfolio? And I realize it's not just one person's decision and you've got a new CEO coming. But as you think about the portfolio going forward, what's the potential for even more change or a greater assessment relative to what you've already done?

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [50]

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Yes. I think that I did look at the whole portfolio and I think that we expect to complete the ATP plan with the remaining 3 divestitures: the U.S. PC, which we've already signed the deal that we expect to close; Mapa/Spontex and Quickie are the 2 remaining businesses to be sold. And once we do that, I don't anticipate that we're going to have another big program like an ATP-type effort. That being said, we're always going to evaluate the portfolio for improvement opportunities. And that could both be divestiture-related or it could be tuck-in acquisition-related. But I don't think you'll see us do a major effort like the ATP plan anytime in the foreseeable future.

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Operator [51]

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

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Christopher H. Peterson, Newell Brands Inc. - Interim CEO, CFO & Executive VP [52]

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Thank you. I would like to thank everybody for participating in today's call and for your interest in Newell Brands. I also want to commend all my Newell colleagues for executing well through a time of uncertainty and transition. While it's still early days in the company's transformation, there is lots to be proud off and a much more compelling future ahead of us. Thank you, and we hope you enjoy the rest of your day.

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Operator [53]

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A replay of today's call will be available later today on our website, newellbrands.com. This concludes our conference, and you may now disconnect.