Newell Brands Inc. (NWL) Q2 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to Newell Brands Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. 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. A slide presentation is also available for download. I will now turn the call over to Nancy O'Donnell, Vice President of Investor Relations. Miss O'Donnell, you may begin.

Thank you. Good morning, everyone. Welcome today's Newell Brands' second quarter earnings call. Before we begin our discussion, I like to point out that our comments today will include forward-looking statements. Actual results or outcomes could differ materially from management's expectations. Please refer to our earnings release and the most recent Form 10-Q filed with the Securities and Exchange Commission for additional information concerning risk factors. Newell undertakes no responsibility to update any forward-looking statements. Let me remind you also that we will refer to certain non-GAAP financial measures today including those identified in the tables of the earnings press release. We provide these non-GAAP measures because management believes that providing insights on the measures discussed enables investors to better understand and analyze our ongoing results. Specifically, the biggest differences between the GAAP and non-GAAP metrics this quarter are one-time charges and other expenses related to the Jarden transaction, including inventory step-up, acquisition-related amortization and other transaction costs. In addition, we're defining Newell Brands core sales as if the Jarden combination occurred April 15 of last year, meaning we are including last year's Jarden results in our 2015 base. Waddington, Jostens and Elmer's are not included in core sales until their respective one-year anniversaries. The reconciliations of these and other non-GAAP measures with the most directly comparable financial measures determined in accordance with GAAP are included in the earnings release and are available on our website. Our call today will be led by Newell Brands' Chief Executive Officer, Mike Polk; and Ralph Nicoletti, our Chief Financial Officer. So, I'll turn it over to Mike now.

Thank you. Good morning, everyone. Welcome today's Newell Brands' second quarter earnings call. Before we begin our discussion, I like to point out that our comments today will include forward-looking statements. Actual results or outcomes could differ materially from management's expectations. Please refer to our earnings release and the most recent Form 10-Q filed with the Securities and Exchange Commission for additional information concerning risk factors. Newell undertakes no responsibility to update any forward-looking statements. Let me remind you also that we will refer to certain non-GAAP financial measures today including those identified in the tables of the earnings press release. We provide these non-GAAP measures because management believes that providing insights on the measures discussed enables investors to better understand and analyze our ongoing results. Specifically, the biggest differences between the GAAP and non-GAAP metrics this quarter are one-time charges and other expenses related to the Jarden transaction, including inventory step-up, acquisition-related amortization and other transaction costs. In addition, we're defining Newell Brands core sales as if the Jarden combination occurred April 15 of last year, meaning we are including last year's Jarden results in our 2015 base. Waddington, Jostens and Elmer's are not included in core sales until their respective one-year anniversaries. The reconciliations of these and other non-GAAP measures with the most directly comparable financial measures determined in accordance with GAAP are included in the earnings release and are available on our website. Our call today will be led by Newell Brands' Chief Executive Officer, Mike Polk; and Ralph Nicoletti, our Chief Financial Officer. So, I'll turn it over to Mike now.

Thank you, Nancy. Good morning, everyone. Thanks for joining our first quarterly results call as Newell Brands. I'm very pleased to report a strong set of second quarter results with positive momentum on a number of fronts. We drove very competitive levels of growth in the quarter, cost synergies and Project Renewal savings are ramping and right where we expected them to be and cash flow was strong, enabling us to pay down $750 million of our $1.5 billion term loan. So a strong start as Newell Brands, and as a consequence, we reaffirmed full-year guidance this morning. The Q2 headlines are as follows. Net sales have more than doubled as a result of the Jarden transaction, to $3.86 billion. Core sales grew 5%, led by strong performances in Writing, Baby & Parenting, Food & Beverage, Yankee Candle and Appliances. On both the reported and normalized basis, gross margins and operating margins were right in line with our expectations. Reported EPS was $0.30 per diluted share. Normalized EPS was $0.78, up nearly 22% versus prior-year. And operating cash flow was nearly $600 million. So all-in, a very good set of second quarter results, with continued momentum in our key businesses and a lot of energy and excitement around the opportunities ahead. Let me hand the call over to Ralph to go through the results in more detail and then I'll return to provide an update on our roadmap forward and the perspective on our outlook for the balance of 2016.

Thanks, Mike, and good morning, everyone. As Mike noted, we were pleased with our second quarter results, with strong reported and core sales growth. Gross and operating margin came in consistent with our expectations and we are on track with our deleveraging plan, as strong operating cash flow allowed us to pay down about $0.75 billion in debt. Overall, a very good start. Turning to our detailed review, second quarter reported net sales were $3.86 billion, 147% increase versus last year, largely from the contribution of the Jarden transaction. Core sales increased 5%. Reported gross margin was 28.4% compared with 39.8% in the prior-year, largely due to a $334 million inventory step-up related to the Jarden transaction. There will be a similar step up impact of around $130 million in Q3 as we expect substantially all of the remaining inventory to turn. Normalized gross margin was 37.2%, down 280 basis points versus last year. The decline is due to the negative mix effect from the Jarden acquisition and the deconsolidation of Venezuela, as well as the impact of unfavorable currency, which more than offset productivity and pricing. Reported SG&A expense was $947 million, or 24.5% of sales, down 70 basis points over last year. Normalized SG&A expense was $827 million, or 21.4% of sales, down 260 basis points versus prior year, thanks to the mix impact from the inclusion of the Jarden legacy businesses, which have historically carried a lower SG&A spend rate, also benefiting from Project Renewal savings and early Jarden deal synergies. Advertising and promotion spending at the Newell Rubbermaid legacy businesses increased 50 basis points in the quarter, driven by incremental investments behind new products, including Paper Mate InkJoy Gel Pens, Mr. Sketch Scented Crayons, Rubbermaid FreshWorks produce saver and Graco Extend2Fit Convertible Car Seats. Reported operating margin was 3.6% of sales, compared with 13.8% in the prior year. The decrease was largely driven by the one-time inventory step-up, acquisition-related amortization costs and other expenses incurred in connection with the Jarden deal. Normalized operating margin declined 20 basis points to 15.8%. Interest expense of $127 million, rose $109 million year-over-year, reflecting a $10 billion increase in debt, resulting from the financing of the Jarden and Elmer's transactions. Our reported tax rate was 20.3%, compared with 22.7% in the prior year. The normalized tax rate was 29.2%, compared with 24.5% in the prior year, attributable to the mix effect of the Jarden acquisition and geographic earnings. Reported EPS was $0.30 per share, compared with $0.55 in the prior year, due largely to a number of acquisition-related charges and expenses. We also had an increased interest expense and a higher share count. These Jarden transaction charges were partially offset by the contribution from the Jarden and Elmer's acquisitions and a gain on the sale of the Décor business. Normalized EPS, which excludes the transaction-related expenses, among other things, was $0.78, a 21.9% increase versus last year. The improvement was primarily driven by strong sales growth, the contribution from the Jarden and Elmer's acquisitions and Project Renewal savings. These benefits more than offset increased advertising and promotion support, negative foreign currency, increased interest expense and increased shares outstanding. I will now move on to our segment results. Starting with Writing, net sales increased 15.8%. Core sales increased 11.3%, driven by strong double-digit growth in North America. We had a very good start with the Back-to-School sell-in, thanks to innovation and increased advertising and promotion. Net sales in the Home Solutions segment decreased 1.1% as strong growth in our Food & Beverage business was more than offset by the negative impact of the divested Décor business and planned exits in the low margin Consumer Storage business and unfavorable foreign currency. Core sales grew 1.7%. Tools net sales declined 3.8%, reflecting continued weakness in Brazil and negative foreign currency. Core sales declined 2.3% as growth in North America was offset by Brazil macro challenges and industrial sector softness in China. Net sales in Commercial Products declined 7.9%, primarily due to the divestiture of the Rubbermaid medical cart business and unfavorable foreign currency. Core sales declined 1.4%, reflecting softness driven by complexity reduction initiatives in the North American distributor channel and in Brazil due to macro challenges in that country. Our Baby segment grew net sales 12.4%, thanks to continued strong momentum at Graco North America, driven by innovation and advertising and promotion. Core sales grew 11.1%. In my discussion of the legacy Jarden segments, I will refer to post-transaction net and core sales, compared against pro forma results for the same period in 2015. Post-transaction net sales in Branded Consumables increased 36.8%, reflecting the Waddington acquisition. Core sales increased 7.8%, due largely to strong growth in Yankee Candle and Home & Family in Europe. Net sales in Consumer Solutions increased 4.9%. Core sales increased 8.3% driven by strong growth in kitchen appliances in North America, Europe and Latin America. Outdoor Solutions net sales increased 53.6%, due largely to the Jostens acquisition. Core sales increased 50 basis points, reflecting strong growth from Pure Fishing, offset by weather-related softness in the ski businesses. Net sales in Process Solutions increased 20 basis points. Core sales increased 50 basis points. Let's now turn to Q2 core sales by geography. Importantly, North America, which represents 79% of total sales, delivered strong core growth of 6.7%. In EMEA, core sales grew 2.6%. Latin America core sales increased 1.9%, reflecting solid growth across the region, with the exception of Brazil. Asia Pacific core sales declined 7.7%, due primarily to softness in Branded Consumables in that region. Moving on to cash flow. During Q2, we reported almost $600 million in operating cash flow compared with $102 million in the prior year, reflecting the contribution from Jarden, including Jostens and Waddington, improved operating results and favorable working capital movements. We also generated $236 million from the sale of Décor. We returned $92 million in dividends to shareholders. We also paid down debt by $750 million, bringing our quarter-end debt balance down to $13 billion. We remain confident in our ability to reach our leverage goal of 3 times to 3.5 times in the next two years to three years. So, a very good start to the quarter and with progress on many important areas. With that, I'll now turn the call back to Mike.

Thanks, Ralph. Since coming together as Newell Brands, we've been hard at work getting to know each other and laying the groundwork for accelerated value creation. Together, we have a strong portfolio of leading brands and significantly greater scale across a number of key channels, customers and geographies, with the opportunity to leverage these assets in a bigger way for expanded reach, visibility, impact and growth. We've identified a number of new growth opportunities and put many into action that will materialize through channel cross-sell, accelerated international deployment and strengthened innovation delivery over time. We're also making very good progress on costs. As previously shared, we've committed to achieve an incremental $300 million in Project Renewal savings over the next few years. And against that target, we've delivered $70 million in incremental savings in the first half of 2016. We also have a clear line of sight to the $500 million of cost synergies, with significant upside potential. The synergy teams have hit the ground running and are now in full flight, with early successes on procurement, where we've already realized $40 million in annualized savings. We're quite confident in our ability to deliver the targeted synergies, given our track record of success on Project Renewal. We're also making good progress on developing the new strategy for Newell Brands. A few weeks ago, my leadership team spent time together discussing the choices ahead and the next steps in our transformation that will flow from that strategy. Critical decisions about portfolio roles and category and geographic priorities were at the center of our discussions. Mark Tarchetti and his team led by Russ Torres led the dialog and much of the thinking. As you'd expect, if you're familiar with how we work, those discussions were underpinned by rigorous analysis. The insights generated will frame a set of sharp portfolio, resource allocation and organizational design choices. In early August, we'll solicit input from the Board of Directors, and with the benefit of the board's perspective incorporated, this new strategic framework will shape our activities and investment choices from 2017 forward. Let me now turn back and take a look at the balance of 2016. This morning, we reaffirmed Newell Brands 2016 full-year guidance. We continue to expect 2016 full-year Newell Brands core sales growth of 3% to 4% and full-year normalized EPS of $2.75 to $2.90. Despite a strong start to the year, we continue to believe that both full-year guidance metrics appropriately bracket the most likely outcome from the full year, which is right in the middle of both guidance ranges. Where we actually fall in the full-year guidance range will depend on three key factors. The first factor relates to the success of the second half 2016 drive periods of Back-to-School on Writing and the holidays on Yankee Candle. We are well positioned against both. Importantly, both businesses have leadership positions in large growing global markets with tremendous opportunity to still capture market share, both in their markets at home and in their markets abroad. Yankee and Writing also have above-fleet average margins structures and so their performance can move the needle for Newell Brands in a meaningful way. On Writing, we have tremendous momentum. The latest 12-week U.S. value market share through the middle of July as measured by IRI is up over 140 basis points, with dollar sales growth of 7%. In Q2, writing had an extraordinary sell-in for the Back-to-School season delivering about $15 million more revenue in this key selling period than we anticipated. While the revenue and the associated income will reverse out in Q3, the strength of the sell-in and the programming and innovation in place bodes well for display activity and merchandising-driven sellout in Q3. As we complete the Back-to-School drive period on Writing, we'll turn our attention to the holidays. The Yankee Candle team is gearing up for the holidays, with strong merchandising plans and with new products on their way to retail. We're pressing forward in a new effort to broaden distribution even further in the U.S. and Canada with incremental placements that leverage Newell Brands route to market in the adjacent channels that could potentially positively impact Q4 2016 and, more importantly, 2017. We're also exploring ways to enhance brand investment in the fourth quarter and certainly into 2017. Importantly, if we find ourselves with full-year earnings upside beyond the midpoint of the full-year normalized EPS guidance range, we will likely reinvest a substantial portion of that upside back into the Yankee Candle business for strengthened consumer impact around the holidays and positive momentum into 2017. The second factor that could influence where we fall in the full-year guidance range is the delivery of Project Renewal cost savings and the transaction cost synergies. We have a clear line of sight to the full-year Project Renewal incremental savings and, as planned, we expect to deliver well over $100 million in incremental savings this year. With respect to the Jarden transaction cost synergies, we are well on our way to deliver our $50 million to $80 million full-year cost synergy guidance, with a good probability of delivering towards the high end of that range. So, we're on track and foresee no issues here, and perhaps some opportunity. The third factor that could influence where we land in the full-year guidance range is product line exits. To be clear, our full-year guidance reflects our intention to actively manage the portfolio. In 2016, we expect to begin to exit certain product lines, with roughly $250 million to $300 million of revenue over the next two years to three years. These are businesses that have low to no likelihood of featuring as strategic priorities for the company. As we've stated, our goal would be to sell these assets, if possible, rather than exit, and we hope to be able to find a buyer for some. If we're unsuccessful at finding buyers, the process of exiting these businesses will begin as early as the third quarter. As mentioned previously, we do not expect a material financial impact related to potential product line exits. While we do not provide quarterly guidance, I do want to provide some context for the flow of our business in the second half. Given the likely Q3 reversal of the Writing incremental Q2 Back-to-School sell-in and the possible Q3 timing of product line exits, we expect Q3 core sales growth rate to be near the bottom of our 3% to 4% full-year guidance range. In Q4, we expect growth rates to recover towards the mid-point of our full-year range. We also expect normalized EPS to skew roughly 10% higher in Q4 relative to Q3 as a result of the holiday season peaking of the profitable Yankee Candle business. So in closing, we've had a strong start to the year on many fronts. We successfully completed the most transformative deal in the history of either Newell Rubbermaid or Jarden. Despite the potential for distraction that a transaction of this size could create, we grew core sales 5% and delivered normalized EPS growth of nearly 22% in the second quarter. We've made good early progress in the integration of the two companies while simultaneously taking a big step forward on Project Renewal. With continued positive momentum in our business, we're well on our way to delivering our 2016 full-year financial outlook. We've committed to reduce the leverage ratio to 3 times to 3.5 times over the next two years to three years. And in the second quarter, we've paid down $750 million of our $1.5 billion term loan. And our work to prioritize our investment choices and realign resource against the capabilities that can differentiate us and the brands with the greatest potential is well underway, setting the stage for future acceleration of growth and value creation. I want to thank our people for their hard work and unwavering focus on delivery. Performance is an everyday thing, and I'm very proud of the determination and the drive for results, particularly in the midst of increasing change. Together, we're building a bigger, stronger, faster-growing and more profitable company, with a portfolio of leading brands that compete in large growing, unconsolidated global categories that are responsive to innovation and brand support and also have a low cost of growth, given the lack of market consolidation. Our confidence is high because our team has done this kind of work before. We are incredibly well-positioned to build these brands and energized by the opportunity to simultaneously create a ton of value for our shareholders. And we're driven by the prospect of building one of the leading consumer goods companies in the world, a company that helps consumers live better every day where they live, learn, work and play. That is both the promise and the potential of Newell Brands. With that, I'd like to open up the call for questions and pass the call back to Ebony.

Thank you. [Operator Instructions] And our first question will come from Dara Mohsenian. Please go ahead.

Hey, Dara.

Hi. Good morning. So, just big picture, Mike, I was hoping you could take a step back and give us a bit of state of the union view of the Jarden business here now that you've owned it for a few months. How much greater visibility do you think you have as you look out over the next few years? What have been some of the positive and negative surprises so far as you've gotten to know that business better? And also, as you look out over the next few years, I guess, what are the biggest opportunities here to drive shareholder value from that Jarden side of the portfolio?

We've had a really good first few months together, I've got to say. I'm really pleased with the way the team is coming together, the connections. I've made this point before that the DNA of both organizations are really similar. This is a highly intense operationally-focused group of business unit leaders that I've had the opportunity to engage with. And in fact, we just came back from – I guess, it was about a week ago now, maybe a week-and-a-half ago. We spent the whole week going through the 2016 back half plans and the outlook for 2017, business unit by business unit. And it was a full-on week every day, five days’ worth of plowing through operating reviews. And I came away from those reviews really encouraged. There's some great brands here. If we do our job and deliver beyond the $500 million in synergies that we've committed to, we're going to release a lot of ability to invest back into the business. If I said – if there was one observation I'd make, it's that while we've got the same level of operational intensity, the P&L in the legacy Newell Rubbermaid side gives us much more flexibility to invest back into the business. So, the combination will release a lot of costs that should enable us to extend some of the core capabilities that have the potential to differentiate us like insights, design, innovation, delivery, e-commerce across the total enterprise, and also the ability to put more advertising and promotion investment behind the businesses with the greatest potential to create value on the legacy Jarden side of the family. Obviously, I talk a lot about Yankee Candle because I know it really well. This is obviously a crown jewel in the company. It was a great acquisition that Martin and Ian did. There's tremendous opportunity to build our footprint there. We love our Writing business. Obviously, we're going to continue to invest across that. Food & Beverage has done really well. The combination of the assets between Newell and Jarden on Baby create a really powerful platform for growth going forward. And in the Appliance business, you can see how responsive the Appliance business is to activity and merchandising. These are great brands. Oster, Mr. Coffee, Sunbeam, these are terrific assets, and some of them even stronger outside of the U.S. than in the U.S. And so I'm really encouraged by the possibilities here. All of our choices will drive off the strategic work that we're doing today. So, we will establish a strategic framework that puts relative priorities in place on these businesses. Many of the Jarden businesses could benefit from the design capability we've built out, and we intend to apply that design capability more broadly to help support innovation delivery over time. And then there's an entrepreneurial spirit in many of the Jarden businesses that I think we'll look to figure out a way to preserve within the context of the operating model we'll eventually build out. Businesses like Jostens are really interesting. They have their own ecosystem and culture. The Jostens business I like, in terms of its scale, profitability, and the ability to spin off cash to fund other potential investments in other parts of the portfolio. So our choices will pivot off the portfolio prioritization work that's underway today. I'm encouraged by what I see. There's always opportunity to do work. I think we have work to do on Coleman to strengthen the brand. It's a great asset with a tremendous amount of equity, but I think the portfolio could be broadened, and the innovation capability we have could be applied to premiumize certain aspects of that business in a way that would give it more growth potential. We have to work our way through on all the winter weather-related businesses, the hangover from last winter, which we've got baked into our guidance, so that'll just be a matter of time and clearing of inventories in certain parts of the business to get ourselves through to a normal year. This won't be the normal year for any of the winter-sensitive businesses. But all in all, my impression is incredibly positive, and I'm really excited and I think the team is energized by the possibilities. It won't be simple. We've got a lot of change that the organization is going to go through over the next six months and into 2017. And we're going to have to do our best to deliver while simultaneously changing. And we've demonstrated the ability to do that. That'll be the key kind of executional issue that we'll have to lead the organization through, but I'm confident because of the experience we have in doing things like this, that we will get through that period of change and really come out a much stronger company on the backside of it, with more growth potential and more potential to create value. That was a pithy answer, Dara, to a very straightforward question. But it's probably my favorite question to answer.

Great. That's very helpful. And then as you think about managing this more complex company post the acquisition, do you feel like you have the capabilities in place that you need from a management perspective to manage the combined business after additions like Ralph? Or is there more to go on that front in terms of head count and management upgrades? And also maybe just discuss Jarden systems and where they are versus heritage Newell? Do you need to upgrade the info systems to give you better visibility in the business from a POS standpoint, or in other areas? And how long that takes?

On talent, I think we will always raise the bar on ourselves with respect to what's required to lead an organization. And our ambition is way ahead of where our current reality is. So, we want to build a team fit for the company we aspire to be, not the company we are today. So, we will always be challenging ourselves to continue to develop. And all of us, including me, have development opportunities. So, we're going to invest in our people and help them grow. A growing company creates great opportunities for personal development, and we're going to ensure that our people have that opportunity. My team is set now. We've talked about potentially one other job, which is a supply chain leadership role. And I think as we go forward, we'll be looking and exploring and figuring out whether there's somebody that can plug into our team dynamic, which I really love now. I'm impressed with the talent that I've got on both sides. I think areas for improvement, we're always going to want to strengthen our commercial operations and strengthen and broaden our customer reach and channel reach in our selling organization. So, that'll be an opportunity for investment. It's not because we're not happy with the people, I just want to broaden the direct selling capabilities in the organization. And supply chain is probably the other area where we'll want to invest to strengthen our capabilities. We've managed the supply chain in a very disaggregated way, and quite frankly, pretty well. But there are opportunities across the network that we're going to want to create a leadership catalyst to activate over time. And this isn't an urgent role to fill, from my perspective, but it's an important area where we want to step up leadership. And Ralph on IT?

Yeah. Dara, on the IT side, significant opportunities, a lot of the focus in the very short-term here is on building some of the infrastructure on the legacy Jarden businesses on just visibility to things like daily sales, point-of-sale information, those kinds of things. That information sort of exists across their group. But we need to develop a more systematic way to get visibility to that kind of across the company and in the center as well on a more daily basis. So, that's a big effort going on now. Also as we develop and formulate the portfolio and the sets of choices that we make, we'll be leveraging what I think is a great platform on SAP that the legacy Newell business developed. And we'll begin to make some migrations to further leverage that platform over time. That will be a second piece. And I would just say the third big effort that is really getting started now really relates to synergies. But there's an IT infrastructure opportunity that we could really unlock some value and costs by harmonizing a lot of the, I'll call, back of the house support for running servers and telecommunications and all those kinds of things. So, that's another piece of systems work that's going on.

Great. Thanks.

And your next question comes from Bill Schmitz with Deutsche Bank. Please go ahead.

Hey, guys. Good morning.

Hey, Bill.

Hey. Can you just like talk about the next 100 days, because you finished the first 100 days? So, what's on the agenda? I mean, I know you talked about the board meeting, but maybe also how you're going to communicate that. So sort of when, perhaps, we'll get like an update on the portfolio or the synergies?

Yeah. Yeah. I've got to say, it's been a really intense 60 days, 90 days on portfolio work and strategic work. And we're very close to putting the pre-read together for the board and getting it front of the board and having a good debate about the opportunities and also the cadence of change in the organization. And that will happen very quickly. We will go to the board August 9 and August 10 and come out of that with their input. And my team will meet right after that, the next week, to really agree on where we go from there. Obviously, you don't drive change from the leadership pulpit. You drive change by socializing change in companies. And we need to engage leadership in discussions about what it is we think is right to do. And that process will begin from that point forward. I think it'll take us probably to the end of September to work through and solicit all the right input and revise plans and thinking. And I think by the fourth quarter, we'll be in a position to talk about it a little bit more openly. And in terms of external communications around it, I think the earliest you'll really hear a deep discussion would be with Q3 earnings and more likely sometime in the early winter with a full on review. But I'm sure, I'd like to kind of not have anybody be surprised by what it is we're doing. So I'm sure I'll preview this through the different touch points we have ahead that are public and you'll be able to – well, by the time we get to talking the story, you'll probably know the story.

Okay.

So, I think that's how you'll probably see this play out.

That's perfect. Thanks. And then is there a way to understand the sources of growth for the Writing business? And then maybe how sustainable you think that is going forward?

Yes. Writing benefited from a couple of things in the second quarter and this is an important point to register. We were very successful at the sell-in, which I love, because at this time of year that's a really constructive thing to do, because you force all these inventories to the floor in retailers, which is how you get the merchandising sell-out. So we're really excited about the fact we nailed Q2, the sell-in period. There are two things underlying the share gains we're experiencing around and the underlying growth we're getting in the business. And one of them is the innovation agenda and the brand support agenda that goes with that. InkJoy gel is going to be a huge hit. You can already see it in the consumption data. I'm really excited to see how it plays post back-to-school and see how much of a step-change we get from it, because the product is beautiful, the ink system is unique and differentiated for anybody who loves gel pens. It's beautiful smooth write, but it doesn't smear because it's got an ink that dries three times faster than the next leading competitor. So it's got a really differentiated proposition. So I think the innovation agendas are going really well. We have also extended the footprint of this business. As you know, our progress in Mexico in Writing is really pretty extraordinary. Our progress in Canada where we're underdeveloped is really quite strong. Bob King who runs the Canadian business has done a great job on writing over the last 18 months to build out our footprint and build the business. And as you know, we've invested to launch Sharpie in the U.K. about a year and half ago. That's going really well. We've got great presence at Tesco and Sainsbury and in the mass retailers in the U.K. and there's opportunity still to be had there. And we will leverage the Jarden business going forward to apply the same principles in France and Germany, leveraging their mass retail footprint. But, I think, the current reality is, it's U.K., it's Canada, it's Mexico and it's the obvious success we've had in the U.S. Part of the success is driven by this macro trend on adult coloring, which has helped Sharpie Fine Point, it's helped Flair, and obviously Prismacolor, which is right in the center of that big trend. And that trend continues. That's a tailwind to this business. That's probably worth a 1.5 point, two points of our growth. That macro event, which it really has nothing to do with our marketing, but we're extremely well positioned to take advantage of it. So the real question there is, is this a sustainable trend or is this a fad that will ebb over time? And that's why I always say to you guys, you should not plan Writing at double-digit core growth. You should build your models with Writing in the sort of the 5% to 7% range, which I think is the right place to be. Now, we've got all kinds of exciting things ahead on writing. If I was with you, Bill, I'd give you the Chinese product that's set to launch, both regular InkJoy, InkJoy Gel, and Sharpie in Shanghai in the fourth quarter. And the product looks great. I've seen the videos of the sell-in discussions with the distributors. That went great. So we're excited by the prospects for broadening the footprint over time, both in France and Germany, most likely, leveraging Jarden's mass retail footprint and, obviously, in China where we've made the commitment. So there's a lot of reasons to be optimistic ahead on this business, and as you know, it's a beautiful category, but lots of share consolidation opportunity around the world.

Great. Thank you so much.

And your next question comes from Bill Chappell with SunTrust.

Hey, Bill.

Good morning. Just going back to Outdoor Solutions. I don't fully understand the commentary behind it. I certainly understand that it was weak because of weather, but I think what Ralph had said had to do with winter sports. And my understanding was winter sports was really kind of a third quarter, fourth quarter sell-in. There is very little sell through in the back half and most of the excess inventory sat with the retailers. So just could you help us understand that? And then was there anything as it connected to your commentary about Coleman that you saw some weakness in the quarter on that business that needs improvement?

Within Outdoor Solutions, we have a bunch of different moving parts. The pure fishing business did really well. But anything that's winter sensitive is dealing with the hangover on inventories from the sell-in from last year and working through that. Within ski, K2 is probably more challenged than Völkl. Völkl had a pretty good quarter in Q2. But there clearly are winter weather-related hangovers in any business that ships a lot in, in the back half of the year, hoping to have it consumed out in the front half of the year. So we're definitely dealing with the hangover there. Coleman is a challenging business at the moment. It's not that we don't believe in it. We do, actually. It reminds me a lot of where Graco was when I started, in that the brand has unbelievable legacy equities. We'll find out maybe before September we'll get these results where we put all of these brands into equity testing. So we're going to get relative metrics that we can compare across the total portfolio. I'm betting that Coleman stands out as probably one of the strongest brands from an equity perspective in the whole portfolio. I think Oster will be there. I think Mr. Coffee, despite people's preconceived notions, will be there. Obviously Yankee I think will do really well. But I bet it's Coleman's top of the league table within the legacy Jarden portfolio, as was Graco and Rubbermaid. But there's work to do on Coleman, because too much of its portfolio sits in the good segment of good, better, best, and that's where pricing and margin contraction becomes an issue if you don't have a broadened footprint. And so the Coleman business I think is going to have an okay year. It won't have a brilliant year because it's stuck with too much of its portfolio in that segment of the market. And that's the segment of the market where you get a lot of pressure. And if you don't have differentiation in your product offerings relative to store brands, then you run the risk of always being under pressure. And that's the cycle. I just guess I'd describe it as that's the cycle that Coleman is currently in. And we're going to have to address that. And we'll address it in the same way we did with Graco. We'll work through. It will take some time. This will be one of those projects that takes multiple years to get right. It's going to require investment in insight. It's going to require investment in design and in innovation. We're a big enough company where we can afford to take a margin contraction and hit on a big brand like that in order to get it reset. But this is going to be one of our big projects. It's actually very exciting because I think the brand has tremendous potential, but we need to get it into a more sustainable pattern of strategic growth. And that will take some time. So it's all hands on deck on that business. It's not a crisis. It's just an opportunity under-leveraged. But this is where the best of our model can be applied. And I think it'll be really interesting to see what we're able to do with it over a couple years.

Okay. I'm still not sure I fully understood the winter sports impact in the quarter, but I'll get back offline on that.

Yes. I'm happy to talk to you privately about it. But the headline is you ship a lot of stuff in the back half of 2015, winter doesn't come, all that stuff sitting there has got to be moved through, and that's the environment we're in. You discount to move it through. We're getting there, but that becomes a hangover that we've got on this year's business. And I'd say Völkl's done that better than K2's been able to do it up until now. And then we have the next season right around the corner, as you point out.

Okay. And just separately, you talked about another $250 million of business to exit. Is that the thought process going forward of 1% to 2% of the business per year you'll look to rationalize, because it's similar to the number you talked about last year? And as you've now looked at years in Jarden's portfolio instead of having a fire sale or a big exit of businesses, is it trimming each year going forward?

Well, we've articulated $250 million to $300 million across the total enterprise, two thirds of which we've said is Jarden, a third of which is the continuation of the repositioning of the Rubbermaid business. But I wouldn't expect us to be exiting 1% to 2% of the business every year. This is the portion of the business that it probably doesn't fit the model or doesn't have real opportunity. It will never get up on the list of investment priorities we'd make, whereas it may be interesting to somebody else. Our priority for that $250 million and $300 million, if we were in a situation where we don't have to bifurcate a trademark, like a Rubbermaid situation, where you can't really sell the stuff you don't really want without licensing the brand, which I'm not prepared to do. In situations where you don't have that scenario, obviously we'd love to find a buyer for these businesses rather than exit them. But I'm not clear at all whether we'll be able to find a buyer for some of them. And so that's why I've laid out this issue of $250 million to $300 million of product line exits. If we can sell them, we'll sell them, because that's a much more constructive way to manage the exit of those businesses. But it's not part of some broader plan to wean the portfolio down. We may make, in the future, strategic choices about the portfolio, but it won't be in the context of businesses that don't necessarily have any role within the portfolio. It'll be about bartering one part of the portfolio for maybe something stronger that's out there that we could acquire in.

Got it. Thanks for the color.

Yep.

And your next question comes from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks. Good morning.

Good morning.

First, just a follow-up on the conversation, I guess it would be on Coleman but also to go a little bit more broadly. I think one of the things you talked about a couple months back was the opportunity to quickly get into some of the businesses with clear profit deficits...

Yeah.

...and that actually being something you could do in 2016. It sounds like on Coleman that you're going to take it on in a bigger way. So does that still hold some of the profit things you want to address very quickly? Is that still in the cards?

There's a lot of different businesses that'll play different roles in the overall agenda. I think the point on Coleman is it's probably an and, that we want to attack the cost structure at the same time, although the cost structure is pretty lean, at the same time as investing in other areas to create more growth potential and maybe more margin trajectory in it. So that one's a give and a take. There are others where there's opportunity to go to market more efficiently. And part of the outcome of the portfolio choices work will be to articulate which businesses should benefit from the full-cost model and which businesses could be managed more entrepreneurially and more efficiently. So there will be change across the entire enterprise with different bits of the portfolio playing different roles and therefore having different models with respect to the cost structure. And there's some of the Newell legacy businesses that will be moved around with respect to prioritization. So there's a lot of cost work going on. There's opportunities within businesses and then there's opportunities across the enterprise. And we're doing both sets of work.

Okay. Thank you. And then in Home Solutions, I was just curious, do you think the run rate for that business, the category as it stands today, not where you might move pieces around. Do you think the right run rate for growth of that business once the exits are done, is it like a mid-single digit rate? I'm just thinking about the growth you must be seeing in food and beverage versus the drag you're experiencing from the Rubbermaid?

Yeah. We have near double-digit growth in the portions of the business that we're prioritizing, but we have pretty significant down elevators on the other side. So that's what's governing the growth. I don't know that I'd build a plan to mid-single digits. But if you were to break out the portion that we're most strategically interested in, certainly that portion needs to grow in the mid-singles, to mid to high-single digits, and that's where, obviously, we're going to dedicate resource. It's also where the opportunity to differentiate product is, which should give us the opportunity to margin up that portion of the business. But, yeah, I think I wouldn't give you a forecast on Home Solutions. But I would tell you that Food & Beverage needs to be growing mid to high-single digits in the model going forward and we believe it can.

Okay. And then just finally on the appliance business. That result was striking and the numbers there have been strong for a long time.

That's amazing.

And that's something I've wondered about, the incremental distribution that Jarden had achieved for that business, the consumer trend towards more at home fresh food using those appliances and so on. Can you talk a little bit about the opportunity you see there, if it's just even at the start better merchandising? And how quickly you can kind of act on that, because the momentum is already so great.

Look, I think there's opportunity for distribution still even at home in some of the channels that Newell competes in. That's some of the stuff that we've already talked about. They've had a nice run in the appliance business. And while we're not quoting pro forma numbers year-to-date for those businesses, it's been a solid first half for the appliance business. And I think people underestimate the quality of the brands. I actually think Mr. Coffee and Oster and Sunbeam are excellent brands. We're going to find out that they have a lot of potential. The challenge in the business was the margin structure of the business. And so will this feature at the top of the list when you've got assets like Writing or assets like Yankee? I think that we're going to need to continue to think about how to get operating margin into this business so that we can right resource it. I do think that there's a huge opportunity in the emerging markets in appliances as people move into the middle class. I think there's a real opportunity to tap into mom's needs in those countries to simplify life a bit. And the portfolio fits right into that space. But there are also opportunities in appliances in the developed world. So there's a lot of potential here. Our challenge will be how much investment can you put into it given the operating margins in the business. And we'll have to work through that. We'll look for the efficiencies where we can get them, again, while increasing investment probably in insights and design to help the innovation funnel along. In the short term, I believe there are distribution opportunities and merchandising opportunities that can sustain solid growth. I wouldn't build a model around 7%, 8% growth. That's a big number on a big business. But mid-single digits, maybe. Maybe in that 4% to 5% range, that's probably the right place to build that business model out. But there are portions of that portfolio that are really interesting in those mega brands that I was describing, really interesting. And then there's some other challenge aspects in that portfolio.

All right. Thank you so much. I'll pass it on.

Okay.

And your next question will come from Steve Powers with UBS.

Hey, Steve.

Hey. Thanks. Good morning.

Good morning.

So, Mike, and Ralph as well I guess, you both mentioned in your opening remarks that cash flow was strong versus your expectations. I just want to press on that a little bit because first half free cash flow net of CapEx has – came in around 35% of adjusted net income. And I realize your business skews heavily to the back half in terms of cash flow generation. But I'm curious as to where you expect to finish the year, either in terms of an absolute level of free cash flow or stated as a percentage of the about $1.2 billion of net income that you've guided to? And then ultimately, do you have a more ambitious objective, if not in 2016, for free cash flow conversion as the integration takes shape, kind of, in 2017 and beyond?

Yeah. Steve, it's Ralph. I guess, a few things on cash flow. Feel good about where we came out. And coming out of the quarter here, we had the benefit of the acquired businesses. There was some working capital movement that was favorable going into the second quarter, both from the legacy Newell side of the business principally on inventory, and then on Jarden across the board. And a lot of that, again, when you go from sort of pre-acquisition to post, there is a lot of movement in working capital. So that did help us quarter to quarter. Overall, we're right on track with where we want to be. So, it enabled us to pay down the debt, as we talked about in the remarks. Still looking at getting by 2018, mid-2018, down to the 3 to 3.5 times level on leverage. And with that kind of run rate, we're going to have a lot of excess cash after supporting the dividends and CapEx and the debt repayment of maybe $2 billion to $2.5 billion in that period of time. There's still room for unallocated cash to drive more value. As it relates to the balance of this year, don't really want to give you an exact number on this year. We're, kind of, looking beyond the calendar there. But quarter to quarter, we're right on track, and we feel good about where we are.

Steve, the only build I would make is that Writing tends to have a good cash-in period in Q3. And, obviously, Q4 is a huge cash window for the legacy Jarden businesses. So, you'll see a nice cash delivery in Q3, but the real cash-in window is Q4.

Q4.

Yes. Yes. Okay. Okay. And then separately, I think, you alluded to maybe a more selective incremental approach to integration. But as you do integrate the Jarden businesses onto the Newell platform and onto the Newell design platform specifically, are you inclined to do that more all at once? Or more serially, more incrementally, more selectively business by business over the course of time to manage the, I guess, integration risk?

Yeah. We'll – it depends on what aspects of the integration you're talking about. On the business unit work, there are businesses that will benefit from investments that we want to get on with doing right away. And to the degree, that's part of the – how you would define integration, we're going to definitely do that. So we've got people needs that we will increase, and money that needs to go into research that's started already. And that's guided by the strategic prioritization work. The corporate duplication synergies we're going after fast. So we're right in the middle of that in Q3. We'll have that largely behind us, all those choices made and done in the third quarter. I would be surprised if there are things hanging out there beyond that. And then with respect to route to market synergies, there's opportunity in every country to look for where those synergies might come. We'll work together as a team to play for the things that make the most sense. And I don't think we'll drag it out over a whole long period of time. I think consensus is that whatever changes we're going to make, we ought to get them done as fast as we can, as long as we are confident in our ability to not be distracted on delivery. And that's why some of the guidance makes sense in the context of a strong first half. There will be a fair amount of work to do in the second half with respect to the integration. But our goal would be to get the organizational-related stuff behind us as fast as possible so we can pivot towards growth and fulfilling the ambition that we've articulated for the company. But will it all be done in one shot? No, I mean, there's a sequence to things that you have to do, and there's – you need to bring people with you on these change journeys. So I wouldn't think of some sudden event. This will be a series of changes that play out in a condensed period of time to get the business pivoted towards creating the future.

Okay. Thank you.

And your next question comes from Joe Altobello with Raymond James.

Hey, Joe.

Hey, guys. Good morning. Just want to talk about cost synergies for a little bit, and I'm not sure you guys gave the number. But what was the number in terms of the second quarter? And it sounds like that probably would be ratable this year. We're talking about the $80 million number in terms of the high side for this year. Would that be $25 million, $25 million, $25 million per quarter?

No, I wouldn't – first of all, Joe, we haven't given the specific number yet. But I wouldn't think about it that way. The only number I gave on synergies other than saying that we could end up towards the high end of the range that we've committed to is the fact that we've delivered in the second quarter $40 million of annualized savings related to procurement. Okay? I didn't quote any numbers for anything else. But there clearly are other things out there that we're doing related to corporate duplication. So I – but we're not intending to communicate a synergy number every quarter, but we'll give you a flavor for it.

Okay. That's certainly helpful. And in terms of revenue synergies, obviously, the cost side takes precedence, I understand at this point. But you guys talked about getting some revenue synergies. Cross-selling, I guess, is the most obvious opportunity, at least near term. Any early wins there? Or is that more of a 2017 event you think?

No. I think, there's some things we're going to get in 2016. So we've talked about a couple of them before, but – and I mentioned one in the script which is we're looking for broadened distribution and presence on Yankee. One of the great – one of the most interesting things about the Yankee business that we've learned is that if you look at the size and scale of the business in Europe per capita, relative to the per capita size and scale of the business in the U.S. and it tells you that there's really opportunity to kind of broaden the footprint of the business here. So we're excited by the prospect of trying to get a Yankee Candle within arm's reach of as many consumers as we can. And so that clearly is the near end opportunity, and Newell's footprint channel breadth offers some opportunity for those guys. Just in the same way that Coleman's channel breadth offers opportunity for the beverage business, and we've made pitches already to key customers on beverages leveraging the Coleman route to market and relationships with customers. So we should see wins quickly to be honest with you. But we're not banking that in revenue upside at this point, and if we were to get that upside we might choose to accelerate some of the exits, so that we that behind us.

Got it. Okay. Thank you, Mike.

And our next question will come from Jason Gere with KeyBanc Capital Markets.

Okay. Thanks. Thanks for squeezing me in and I guess kind of dovetailing a little bit on Joe's last question, if you think about the benefits of scale at this point, we have been hearing just about some retailer inventory tightening in some kind of specialty retail channels. So I was just wondering if you could talk about having that incremental scale, how that's helped you in some key categories? Or do you feel that maybe some of the areas you've been a little bit susceptible to? So I was just wondering if you can put some color around that.

You know I'm not a big fan of using retail inventory as a conversation point. There's always pressure on retailer inventories. If I were a retailer, I'd squeeze inventories as hard as I possibly can because they're rewarded on return on invested capital. So as a manufacturer, as a supplier, you have to accept that as part of their business model and you have to deliver your business plans in the context of ever increasing pressure on inventory positions. There always can be, sort of, discrete windows where events happen. We saw one of those in Q1 of 1996, or 2006, with Wal-Mart and where they really created an event in a short period of time for everybody. And – but they're so few and far between. So there's always pressure on inventories. There's always a dynamic that occurs when retailers consolidate or exit, but we ought to be able to anticipate those things and work our way through them and not have them really come up as guidance discussion points with you guys.

Okay. Good. Great answer. And then I guess the bigger question I have is, as you learning more and more about all your kids now, and you benchmark, I guess, the Jarden businesses and the Newell businesses and looking at productivity, do you see clear differences in terms of the performance of these – of the legacy Newell businesses and then the Jarden businesses that you've just acquired and the ability to kind of narrow the gap between the two?

Look, I think there's a lot we can learn from the Jarden businesses on the Newell businesses. I mean, the Yankee story is really a pretty incredible story about extending a brand and taking risks in geographies. And I think, we haven't been as courageous as that team has been, and Jim, Martin and Ian were on that business after they acquired it. So there's an important lesson learned there for us, legacy Newell Rubbermaid folk. I think there's opportunity connected to applying some of the lessons learned we had through the growth game plan to a set of assets that Jarden had available to it. And I think the fact that we will manage the portfolio in a different way where we don't just – we don't look at individual businesses with specific accountabilities, we make trade-offs on investments across the landscape, we manage resources dynamically, horizontally across businesses more actively than the Jarden team did. That'll give us the flexibility to make some investments that wouldn't have otherwise happened in a Jarden model, like on Coleman. This is going to be a one year or two year series of investments we have to make. We'll try to fund it within Coleman, but the likely answer is that it'll be funded from outside of Coleman and we'll mortgage or rip costs out of corporate or do something that enables us to make those investment bets and take the step back on EBITDA margin while we're fixing the business. That's the thing that we will do differently. So there's really different business conditions and different things that can be learned from both sides of the new company, and that we really intend to do that. I'm – I have no pride of authorship, other than things I believe are important and applicable. But if there are things on the other side that I wish I had done on the legacy Newell Rubbermaid businesses, I'm going to be selfish and take them and go do it. So and there's plenty of examples of that. When I said at the very beginning in December that we're going to take the best of both, really meant that. Best of both talent, best of both ideas for how to go to market, best of both sets of learnings. And we're going to apply it across the enterprise.

Jason, it's Ralph. Something else maybe just to add. Likewise on the, I'll call, functional side, plenty of opportunity, we get best practices let's say in the financial area, as it relates to cash management, treasury, tax, those kinds of things. So seeing really strong practices in both groups that there'll be some group learning, and we'll be able to leverage that over time as well.

Okay. Great. Thanks a lot, guys.

And you next question comes from Olivia Tong with Bank of America Merrill Lynch.

Hey, Olivia.

Hey, Mike. How are you?

Good. How about yourself?

Good. Good. Thanks. So first just in terms of the Jarden portfolio. Clearly you're very bulled up about various parts of that. And it doesn't seem like you've really obviously unleashed the model yet. So where do you think these branch and grow with that added support, particularly given that you are able to achieve what looks like about 4% to 5% growth on the toughest comp of the year? So that's the first question.

Yeah. Look, I think long term it's a very exciting set of possibilities. I think in the next – what we've said in terms of guidance on core growth for this year and next is 3% to 4%. And we're very unlikely to change that guidance because there's a lot of work to do within the portfolio that will both help the growth agenda, but some things that will, given how we define core sales, potentially hurt the growth agenda. So, we're going to work through that over the first 18 months. And I have a very long view on our agenda and the company we're trying to build. And I think we get growth acceleration after we get through this period, this transition period of change and portfolio work. But we haven't committed to what that is. But certainly Q2 where there was less portfolio activity is encouraging. So that tells us a little bit about what's possible, and that's without the benefit of applying the best of what we could potentially apply from a capability standpoint. I do think the things to look at if you want to get a sense of what's possible, who would've thought Baby would be growing at 11% five years ago? And if you look at the period in 2012, 2013, was compounded 10%. Who would've thought Writing would be growing 11% double-digit core growth in the first half of the year when we first started. And there's a lot of talk about technology convergence making, Writing was dead with the first series of questions I've gotten, why would I ever bet on Writing. But that's obviously not true. And so there's – there are lots of reasons, if you look back at the evidence over the last five years, to believe that these brands will respond to investment activity and capabilities in the area of design and innovation. And our challenge as leaders is to figure out how within the P&L to free up the space to drive that investment forward while simultaneously delivering the margin improvement committed to in the deal. And I think it's doable. I mean I'm excited by that. The question becomes how much growth potential is there really here? I don't know. But Q2 certainly, Q2 and the other evidence, would suggest that when we get it right, we can grow really well on these businesses. And they're really responsive. And probably the most important strategic chart for investors to look at is the one that talks about the size of these markets, our position in the markets, the relative, the market share – the cumulative market share of the top three players in these categories globally, and then the cost of growth. And that is a really attractive chart, because it tells the story of what's possible in this set of categories, these types of categories, relative to what's possible in fast-moving consumer goods where they are far more consolidated. The top five have 90% of the share, and the cost of growth is so high as a consequence. And so this is a much more attractive space to be playing in, if you really think about it in that way, as long as you can tackle the costs and release the costs in the P&L to be able to invest behind the brands. And we had a theory that these categories would be responsive to activity. We now have plenty of proof that they're responsive to activity? So this algorithm is working and it has the potential to even work harder across this broader canvas once we get through the transition period.

Got it. Thanks. That's very helpful. If I could turn to the legacy Newell businesses then, just in terms of the profit by segment, Writing's obviously made a huge contribution over time and it's always been an outsized contributor. But even going back to prior back-to-school sell-in periods this was particularly notable. So how comfortable are you with, sort of, the makeup of the profit contributors by segment? And do you think that normalizes as sort of the back-to-school season closes out?

I think Writing – we have to be careful to not bank too much profit out of Writing because there's so much opportunity to grow and strengthen our share position around the world. And so the balancing act when you've got an operating margin as high as the one we have, is to not get too ambitious for the margin, and to really think about the growth. I think we've struck the right balance up until now. We've substantially increased the amount of A&P in that business over the last five years, and while geographic footprint extension will require incremental investments if we don't want to mortgage investment levels at home, I'm not sure how much more – it doesn't really need, I don't think, given the competitive set, personal care levels of A&P ratios. So we're getting close. If we can get ourselves to 9%, 10% A&P ratios I think we've got a really interesting and extendable place to be. And then I think some of the other businesses, we want to continue to work on the margin structures. So a lot of the work we're doing on costs are in businesses that have less to offer in that respect and we have to do more. We have more work to do. That's why there's $230 million left on our project renewal roadmap, is because we want to get the margin flexibility into that portion of the P&L such that we do have the ability to invest. Now in the combination, we may not choose to re-apply the investment where we get the cost savings out. I may take that money, Ralph and I may take that money with Mark and give it to Bill and ask him to go spend it on Yankee, because that's a better choice that makes the whole greater than the sum of the parts. So we have plenty of room to go, room to run on costs on the legacy Newell business. And we have scale leverage to be captured through the integration in route to market, in cost to serve, in many, many places that we're going to be able to go after. And we should be able to get beyond the $500 million such that we have increased firepower. The question is how quickly do we do that and how quickly are we confident enough in that outcome that we're prepared to share that with you.

That's great. Thanks, Mike. Appreciate it.

And your next question will come from Kevin Grundy with Jefferies.

Hey, Kevin.

Thanks. Good morning guys. Mike, I just wanted to follow-up on the Jarden portfolio question just to make sure I'm clear with that, because the business clearly has very strong momentum. The 5% organic sales growth clearly came in ahead of expectations. So is it really the product line exits? There's nothing suggesting that the momentum should slow, because it looks like the guidance which you conservatively took down to about 2% to 4%, it feels a bit conservative relative to the business momentum that has continued since the deal closed, particularly in JVC and JCS. I just wanted to make sure that I was clear on that. And then secondarily, I don't know if you're prepared to comment on this today, but Yankee, and I share your optimism there and what you could potentially do with the business, can you talk a little bit about your willingness to expand the retail footprint, distribution opportunities, particularly abroad, potentially product category expansion plans, leveraging that brand equity and we've seen a little bit of that at a large mass customer in auto air fresheners. Maybe you could build upon that a little bit and further context. The CEO of Jarden thought that they could double the size of that business over a reasonable amount of time, which I also agree felt reasonable. Maybe you can comment on that a little bit with respect to the potential long-term growth rate for the business. Thank you.

Yeah. So the first part of your question on sustaining a 5% growth rate on the total business, clearly part of the reason we won't do that in the back half of the year is product line exit-related. Part of it is because I think it's the prudent thing to do, given the amount of change the organization's going to go through. So it's the right kind of cautious stance to take. Whether we beat that or not, time will tell. But Q2 didn't really have any material product line exits executed in it. So that's part of the discussion. I don't want to get too specific on where those exits will occur because I don't want to be disruptive, either internally or compromise potential external opportunities to sell some of these assets. So I'm cautious on that one, and I know that feels like a bit of a fudge. But I think it's actually in your interest and in the investors' interest for me to manage it that way. On Yankee. Look, the compound annual growth rate on Yankee has been around 7% for a long period of time. So if you want to double a business, all you've got to do is compound the growth at 7% for 10 years. Now, I'm not time-bounding how long it will take to double the business. But that's how the math works on that. Do we believe in Yankee? Absolutely. Do we believe in Yankee as much as we believe in Writing? Yep. Will Yankee end up being right up there at the top of the list of things we want to bet on? Yes. And is there an immense opportunity here? Yes. Is it broader than fragrance candles? Work to be done to confirm, but my intuition says, yes. And so we'll see. It's a big category. It's a very, very strong brand. The experience in Europe that Jarden really has led increases confidence in the ability for the business to travel. And that is one of the reasons. That, coupled with the margin structure, coupled with the ability to create beautiful products through design, are a number of the reasons that it factors as a potentially really attractive play for us.

Great. Congrats on the quarter.

Thanks.

And your next question comes from Wendy Nicholson with Citi.

Hey, Wendy.

Hi. Good morning. Two questions. First on Yankee specifically. Number one, can you just remind us how much of that business is seasonal? In other words, in the fiscal fourth quarter, how much of the business shows up? Second thing, the Nielsen data has not looked good for the last couple of months for Yankee. And I'm just wondering if that's irrelevant because it's such a small piece of the business. If there's something funky in the data. So if you could comment on that. And then my second question is, just as you begin to look at the Jarden business, do you have a sense for the ballpark 4% of sales on advertising that you have talked about spending or you think it's right for the Newell business? Is that going to be higher or lower going forward for the Jarden business? Thanks.

Thanks, Wendy. So I don't think Nielsen or IRI are going to be really good ways to measure the underlying performance in the business, in part because they've got to order a $500 million retail business that's not in there. And also I think that you're not able to see the direct to consumer piece of that through Nielsen. So we'll do our best to help you understand the underlying performance. I'll have to figure out how to do that. But there's no way we'd be growing 7% if we weren't having really good sell through, and it's been consistently there. So I wouldn't use that as an indicator. I think that might be misleading because it will be such a small piece of the franchise. But you know what I'll do, Wendy, is we'll go do the math and figure out what percentage of the U.S. business Nielsen is really representing so I can be more precise with you than what I just said. What was the second part of your question?

On the seasonality. How big a deal is the fourth quarter?

Well, obviously, Q4 is a big deal because of the retail portion of the business, largely. And I haven't lived through a Q4 on the Yankee yet. But the Jarden folks do caution me to buckle up for Q4 because of the amount of revenue and profit that comes in between when the holiday merchandising and retail really kicks in in the end of the quarter. So it's a big bit of the overall performance of the business. I'm actually going to just take a sneak peek at one of my cheat sheets because I don't mind giving you the quarter four percent. But I don't know that I've got it in front of me. Wendy, you know what we'll do? I'll have Nancy follow-up with you and just give you a snapshot of how the Yankee business profiles by quarter. We've got a lot of seasonality in the business. We just came through Jostens', for example, key period in Q2 where nearly 50% of the annual business is done in the second quarter on Jostens. Yankee is I don't think quite that high, but it's a pretty high quarter. And there's another element to that, which is the relative profit contribution, which is also quite high in Q4. But I don't have any problem passing that along. So let us do that after. It's probably about – I would guess, it's close to 40% of the revenue is in the fourth quarter.

Perfect.

On Yankee. That'd be a rough estimate, but Nancy will get back with you precisely.

Perfect. And then on advertising?

On advertising. Look, I'm not ready to declare really what I think the end state advertising A&P ratio ought to be for the business. We're going to work through that over the next month or two as part of the strategy work. As you know, on the legacy Newell businesses I was targeting 7% A&P ratio. I think the average across the total business is going to be something less, substantially less, than that when we get to articulating it. But it wouldn't surprise me that we would want somewhere near 5% across the total landscape. There are portions of the business where we really have learned either it doesn't work and therefore we'd be better off pivoting that investment to selling expense on the legacy Newell businesses and then there's specific businesses within the Jarden footprint that really we wouldn't put big A&P behind, Process Solutions being one of them. And there are some other businesses as well. So I'm not ready to declare, but I think it's certainly less than 7%.

And, Wendy, I think importantly as we move forward in communication on this area, we'll probably more guide to total A&P spending and talk about specific categories across the whole enterprise, not legacy Jarden businesses versus legacy Newell, because we're going to allocate across all.

Perfect. Makes sense. Thanks much.

And your next question will come from Stephanie Wissink with Piper Jaffray.

Hey, Stephanie.

Hi. Good morning and welcome, Ralph, officially.

Thank you.

Just two really quick ones. Mike, you mentioned that the cadence of sales in the back half kind of the Q3, Q4 split, but you didn't mention the anniversarying effect of Jostens or Waddington in that?

Yeah.

So I'm just curious if you can give us some sense of how we should be modeling the incremental businesses that are joining the core sales?

Sure.

And then Ralph, one for you just on the – this is a bit of a follow-up to Wendy's earlier question, but as the costs come out of the business, it sounds like a lot of that is in background functions and, Mike, you mentioned some investment back in at the brand level. So can you just help us think about the relationship between gross margin and SG&A, maybe even over time, not necessarily just in the next couple of quarters, but how those should evolve in relationship to one another? Thank you.

I'll start on the gross margin SG&A side. I think the way to think about that is once you look at it on a pro forma basis, so that there's no mix effect of the combination of the businesses, we'll look to grow our gross margins over time through a combination of driving innovation and mix. Our assumption is on cost, that we'll be able to price costs away over time. So any cost increases, we should be able to manage through pricing over time. In any one particular month or quarter, there'll be some lumpiness to it, but we should be able to manage that over time. And then leveraging our fixed costs that still sit up in the gross margin line through growth is the other piece. So we should grow our gross margins, and some of that gross margin improvement is going to get reinvested into the A&P line as Mike alluded to earlier, as we look to kind of settle out at an A&P range across the whole portfolio, which should get us, ultimately, some operating income improvement.

On your question on Waddington and Jostens, Waddington will come into core sales on August 1, that anniversaries the acquisition that Jarden made of Waddington. And Jostens will come in on December 1. So Jostens really won't feature in core this year. Waddington will begin to feature in core. Jostens, interestingly enough, as a little sound bite, grew in the second quarter, which is really important and good news. But I think the way to think about it is, that Jostens growth rate will be dilutive to the overall core growth rate of the company, because we don't expect Jostens to be much more than a 1% to 2% growth business. So you have to build that into your thinking as well. And Waddington has some interesting opportunities, so I wouldn't declare which way Waddington will break. I think depending on whether we resource some of the opportunities there, it could be accretive to our growth rate.

Thank you, guys.

And your next question comes from Joe Lachky with Wells Fargo Securities.

Hey, Joe.

So I know you haven't given specific 2017 guidance yet, but I was hoping maybe you could talk a little bit more generally? So, obviously, you've headwinds in Q1 because of the interest expense and then Jarden seasonality, but, I mean, I guess through 2017 you should begin to see some accelerating synergies here. So I guess overall, I mean I know you've talked generally about accretion from the deal, but I'm wondering if maybe, given the headwinds, we should prepare for a below algorithm EPS growth year for 2017, just kind of wanted your thoughts on that.

Yeah. You know I think last call we had, we talked about this specifically and Q1 would definitely be a dilutive quarter versus prior year because of share count, interest expense and the fact that it's not a great normally a big quarter for the Jarden businesses. So we, in all of the conversations that I've provided around accretion, I talked about year one being high single digits. Now we may do better than that, given some of the numbers we're putting up. But Q1 definitely is going to be dilutive, needs to be built into the model that way. I looked at your guys' estimates for Q1 through First Call and I don't want to get into a specific number, but they're close to what I would think it would be. But we shouldn't be thinking about Q1 being a big winning quarter for us from an EPS perspective. So it definitely needs to be built into your models that way on share counts, on interest expense alone. And then the other side of this is, although synergies will work as a positive, as will renewal savings work as a positive, but on balance there's no way to overcome the share count. Because remember, your share count's going from 260 million to something almost double that. So not a chance we're accretive in Q1. But full-year, I think you guys are pretty close in aggregate. I don't think everybody's got their estimates in for 2017, but when we get closer, you should expect us with Q3 earnings to provide some perspective on 2017.

Okay. Thanks.

And your final question comes from Rupesh Parikh. Please go ahead. From Oppenheimer.

Hi, Rupesh.

Hey. Thanks for fitting me in. So I just had a quick question just overall on the retail landscape. So we've continued to see challenges with brick-and-mortar retail, Sports Authority going bankrupt and other challenges with sporting goods. Just as you look at your business, are there challenges for the brick and mortar space accelerating and are you generally recapturing that on the e-commerce side of the house?

I don't look at it as shift, but we are definitely investing in e-comm, both direct-to-consumer, pure play e-comm retailers, and then bricks and mortar dotcom equally important to us to pure play. So clearly, there's a shift in shopping behavior underway in the U.S. and we want to reach consumers where they shop. And we also want to win with winning customers. And so those two principles drive the allocation of resource for us. In order to reach consumers where they shop, when they're shopping in an e-commerce environment, we've made the determination that we need to invest in specialized skills and we've built out a whole team of e-commerce resources from the outside that are really driving our activity plans in these areas. And so we intend to continue to step up investment in this area this year, next year, the year beyond. And this can be, and should be for Newell Brands, a differentiated capability, relative to our competitive set. That does not mean we're taking resource away from our bricks and mortar partners. Wal-Mart is our biggest partner. A big 95% of their business with us is brick and mortar still. So, obviously, for all of those folks that are in that phase of striking the right balance within their business model, we need to resource our relationship with that customer and our programming with that customer in a way that fits their strategic roadmap. And so that's the moment we're in with respect to e-commerce. We expect to disproportionately grow our e-commerce business relative to bricks and mortar. And we want to grow ahead of the market growth in the channel because we want to have our share of market in the e-commerce channels, plural, greater than our share of market in brick and mortar because as shoppers shift to that channel, we do not want a negative share mix effect on the aggregate market. And so really, really important, one of the dislocating ideas and the most important things we do as a company over the next 5 years to 10 years is to be in front in this space.

Okay. Thank you for all the color.

There is...

Yes. Thank you, Ebony. I think that's our last question. I would just end by saying, and this is probably a message to our team. I'm incredibly proud of our team for what we did in the second quarter. A deal like this has the potential to be incredibly distractive, and the team was able to focus on delivery in an unwavering way that inspires confidence in our ability to really play for the upside in the combination. So thank you to my team if you're still listening. And let's go after the upside together. Talk soon, everybody.

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