Newell Brands Inc. (NWL) Q1 2017 Earnings Report, Transcript and Summary

Good morning and welcome to Newell Brands First Quarter 2017 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. Ms. O'Donnell, you may begin.

Thank you. Good morning. Welcome to our first quarter 2017 earnings conference call. Joining me this morning are Mike Polk, our Chief Executive Officer; and Ralph Nicoletti, our Chief Financial Officer. Before we begin, I'd like to point out that we will refer to certain non-GAAP financial measures including, but not limited to, core sales and normalized EPS. Schedules of non-GAAP measures and a reconciliation of these measures to the most directly comparable GAAP measures are provided in our press release. Forward-looking statements made during the call reflect our current views. Actual results or outcomes could differ materially from management's expectations due to a number of risks and uncertainties which are described in our press release and SEC filings. We assume no obligation to update these forward-looking statements going forward. Thank you. And I'll turn it over to Mike.

Thank you, Nancy. Good morning, everyone. Thanks for joining our call. We've had a good start to the year. Consistent, competitive growth coupled with increased earnings momentum and in-line cash flow delivery have allowed us to raise earnings guidance and increase the dividend. Net sales were about $50 million above our expectations and core sales grew 2.5%, with growth in all four regions and in four of our five new reporting segments. This is a competitive outcome in a volatile environment that was enabled by our multi-year focus on brands, innovation and e-commerce, and our ability to play our portfolio across diversified categories, channels and geographies. We delivered over $115 million of savings, which generated good, normalized operating margin. And, as a result, we achieved stronger than expected normalized EPS of $0.34. We've reaffirmed our full year 2017 net sales and core sales guidance, and have raised normalized EPS guidance by $0.05, reflecting our latest estimate of held for sale timing in a less negative forex impact than originally expected. We're pleased and particularly encouraged by some specific performances. E-commerce, which represents over 10% of our global net sales, grew strong double digits. Our international markets contributed meaningfully to our overall core sales growth, with nearly 12% growth in Latin America, over 5% growth in Europe, and over 4% growth in Asia-Pacific. Within the five new segments, we had standout business unit results on Writing, Baby, Appliances, Waddington, Jostens and Process Solutions. Each of these businesses delivered core growth of greater than 5%. And Yankee Candle returned to growth, driven by continued double-digit growth in Europe, building momentum behind distribution wins in North America, and our new personalization platform making its way to our retail stores towards the end of the quarter. While inventory reduction by U.S. retailers was a meaningful headwind in the first quarter, I'm encouraged by how well our businesses delivered through this turbulence. In the U.S., our aggregate market share grew over 40 basis points in Q1 and we grew market share in categories that generate two-thirds of our U.S. sales. Our differentiated relative performance has been enabled by our ability to quickly adapt programming to changing conditions, our leverage in the scale and diversification of our category and channel footprint, and our agile ways of working as a hands-on entrepreneurial leadership team. In the first quarter, we've also made very good progress strengthening and focusing our portfolio, completing six transactions in or just subsequent to the quarter. We completed two acquisitions, the Sistema food storage business and the WoodWick fragranced candles business and four divestitures: tools, consumer storage totes, fire building and fire starting, and our rope and chain business. And we've announced an agreement to divest Teutonia, our central European baby gear business. With the available net proceeds from divestitures, we reduced debt by over $700 million, bringing our cumulative debt reduction since the Jarden transaction to nearly $2.8 billion as of the end of the first quarter. So we're making good progress and I'm very proud of our people. They've achieved these strong results in the context of significant organization change and the startup of our new operating model. Importantly, the board shares this confidence, and this morning we announced a 21% increase to the quarterly dividend. So, as I said, a good start to 2017. Let me hand the call over to Ralph for a deeper dive into the quarter and then I'll return to provide perspective on the balance of the year and reflections on the path forward. Ralph, over to you.

Thanks, Mike, and good morning, everyone. As Mike noted, we are delivering competitive results in the midst of transforming our organization. We achieved 2.5% core sales growth, delivering over $115 million in synergies and Project Renewal savings, and made good progress deleveraging the balance sheet. We believe we are well positioned to deliver our full year forecast despite a challenging environment. As we walk down the income statement, I want to point out that we are in our last full quarter of comping against pre-Jarden transaction results. This makes it a bit more difficult to parse out the underlying progress of the business, as the acquired Jarden businesses had a margin dilutive impact on combined results and, of course, we now carry higher interest expense and share count. On an underlying basis, we are generating strong operating income growth and the work we're doing on cost synergies and Project Renewal savings is having a meaningful positive impact on margins. These benefits will become more visible after we anniversary the transaction on April 15, 2017. So with that in mind, let me turn to the details. First quarter reported net sales were $3.3 billion, a 148% increase versus last year, which was largely attributable to the Jarden transaction. Core sales increased 2.5%, with notable growth drivers being in Baby, Appliances, Writing, Food Storage, Jostens, Waddington and Process Solutions. Core sales growth was broad-based geographically with growth in all regions. Reported gross margin was 34.2% compared with 38.5% last year. Normalized gross margin was 34.5%, compared with 38.6% last year. The declines in both reported and normalized gross margins were driven by the negative mix effect related to the Jarden transaction, input cost inflation and the unfavorable effect of foreign currency, which more than offset the benefits of synergies and productivity. We reported SG&A expense of $930 million, or 28.5% of sales, a 100 basis point decline versus last year despite higher acquisition and integration costs. Normalized SG&A expense was $778 million, or 23.8% of sales, a 170 basis point decline. The improvement in both SG&A ratios is driven by the mix effect from the Jarden legacy businesses, which with the exception of Jostens has historically carried a lower SG&A ratio. SG&A also benefited from cost synergies and other savings, which more than offset the impact of the incremental investments we are making in brand development, insights and e-commerce. Reported operating margin was 4.8% of sales, compared with 9.5% in the prior year. Normalized operating margin was 10.6%, compared to 13.1% in the prior year. Interest expense of $122 million was an increase of $93 million year-over-year, reflecting higher borrowings used to finance the Jarden acquisition. We continue to anticipate 2017 interest expense of around $475 million. Our reported tax rate was 19.2%, compared with last year's reported tax rate of 21.9%. The normalized tax rate was 28.1%, compared with 27.2% in the previous year. We continue to expect the 2017 tax rate to be about 23%, reflecting anticipated discrete tax benefits in the third quarter, where you should see the rate substantially below the other quarters in the high single digit low double-digit range. We ended the quarter with 486 million diluted shares outstanding, up from 270 million in the prior year, reflecting the shares issued for the Jarden acquisition. We now expect the full year share count to be at or around 490 million shares. Reported EPS was $1.31 compared with $0.15 last year, which is largely attributable to the impact of the $784 million gain on the Tools divestiture. Normalized EPS, which excludes that gain as well as transaction-related expenses and certain other charges was $0.34, compared with $0.40 last year. Turning now to our segment results. Please note that we are now reporting in our new segment structure of Live, Learn, Work, Play and Other. You can refer to our IR website for a detailed review of the new segments and a preliminary unaudited recast of 2016 quarterly data. Our new Live segment, which includes Appliances & Cookware, Food, Baby and Home Fragrance divisions, generated net sales of $1.1 billion, compared with $322 million in the prior year. Core sales increased 2.7%, reflecting strong results from baby innovation, appliance merchandising and club channel growth and new distribution on Food Storage, partially offset by some softness in Cookware, as it comped the launch of Calphalon Select in the prior-year period. Net sales in the Learn segment, which comprises Writing, Jostens and Fine Writing, were $569 million, compared with $385 million in the prior year. Core sales increased 7.6%, driven by strong growth on both Writing and Jostens. Writing growth was driven by geographic expansion on Sharpie, innovation on both Sharpie and EXPO and slime-related promotion on Elmer's, partially offset by retailer inventory reductions in pens and pencils in the distributive trade. Jostens growth was driven by good underlying results in Scholastic and new business related to the Cubs World Series rings. In the Work segment, which includes Consumer & Commercial solutions, Waddington and Safety & Security, net sales were $614 million, compared with $269 million in the prior year. Pro forma core sales declined 2.9%. Waddington contributed strong growth across all of its product categories with continued double-digit growth on the Eco product line. The Commercial & Consumer solutions business was negatively impacted by inventory destocking, primarily in the distributor channel, and some refuse and cleaning distribution losses in the home center channel. The Play segment, including Outdoor & Recreation, Fishing and Team Sports, generated net sales of $628 million, compared with $61 million in the prior year. Pro forma core sales grew 0.5% as growth from Contigo beverage containers, Coleman coolers and Team Sports was partially offset by inventory destocking at Fishing and ongoing challenges on Coleman camping. The Other segment, comprised of Process Solutions, Home & Family and assets Held for Sale, contributed $388 million, compared with $278 million in the prior year. Core sales grew 12%, with good growth on (13:41) and Process Solutions. About $8 million of the Process Solutions growth relates to zinc pass-through pricing with the balance driven by volume growth and distribution gains in both coinage and applied materials. During Q1, operating cash use of $289 million reflects the expected seasonal nature of working capital across both legacy businesses. Also, this year there are some anomalies in the pacing of cash flow that I would like to point out. Cash tax payments of around $340 million, related to our tools divestiture, will flow through operating cash flow starting in the second quarter. Additionally, cash interest payments related to the increased debt levels from the Jarden transaction occur primarily in April and October, whereas last year, payments started in October. Importantly, we remain on target to achieve our deleveraging program goals for the end of 2017. As of today, we have reduced gross debt by $1.1 billion through our recently completed tender offer. We expect to pay down approximately $1.8 billion of debt in total this year, and cumulatively $3.9 billion since the acquisition of Jarden. As a result, we expect to have leverage at about the targeted EBITDA range at the end of the year, well ahead of schedule. In summary, we are pleased with the progress we made during the quarter as we both delivered on our commitments and invested in the future during a time of significant transition. I'll now turn the call back to Mike.

Thanks, Ralph. Let me now give some quick context on our outlook for the balance of the year and then transition to a discussion about the progress we're making transforming the company. This morning, we've reaffirmed our 2017 full year guidance for net sales and core sales growth, and raised our normalized EPS guidance by about $0.05, actually, exactly $0.05 per share to $3.20. There are two factors that can influence where we fall in our 2017 full year guidance ranges: the delivery of our synergies and savings commitments, and the consumer response to our planned brand activities. With respect to our cost synergies and savings programs, we're right on track. We delivered over $115 million of incremental cost savings in the first quarter against our full year commitment of greater than $300 million. These savings have emerged quickly because we acted with speed in 2016, implementing both the first and second waves of procurement savings and the rapid reconfiguration of our organization. While in the first quarter the benefit of these savings are not as visible in our year-over-year normalized EPS results because of legacy Jarden seasonally low profits and the negative impact of incremental interest expense and higher share counts associated with the transaction, the savings are flowing into the P&L just as we expected, strengthening our underlying margins and also funding our strategic growth investments. So we're right on track with where we expected to be, and the disciplined execution of the Transformation Office gives us full confidence in our 2017 delivery. We're also making good progress and expect to deliver competitive levels of core growth towards the middle of our full year guidance range. Our core growth delivery will be dependent on excellent execution of our growth priorities, continued strong e-commerce growth, and continued market share gains in an environment of modest category growth. Despite withstanding substantial inventory pressure over the last six months, we're beginning to realize many of the revenue opportunities of the combination. We also see the benefits of our investments in e-commerce, design, innovation and brand-building, yielding strengthened new product, new distribution and new marketing plans in many of the businesses. We just launched new products like Sharpie Art Pens, EXPO Ink Indicator markers, Paper Mate Color Leads mechanical pencils, Ball Spiral Fresh preserving jars, Crock-Pot Cook & Carry portable crockpots, Rubbermaid balance Meal Kits, and Graco SnugLoc, a new product that dramatically simplifies car seat installation. We're deploying our portfolio and driving new distribution with Coleman camping and cooler wins in the club channel, Paper Mate InkJoy gels now expanded to Europe, the direct selling of Graco baby gear in Canada, and Yankee Candle U.S. wholesale distribution wins which should help the business in the second half of 2017. And we're driving new brand activity to markets around making slime with Elmer's to meet the incredible consumer-driven need to make slime with Elmer's and personalization kiosks into every U.S. Yankee Candle store by Mother's Day, and by broadening our back-to-school eventing beyond writing to include Marmot, Rubbermaid food storage and Contigo, many of these programs amplified by our rapidly scaling e-commerce capability in both Retailer.com and pure plays like Amazon. So again, we have a line of sight to delivering consistent, competitive growth with full year core sales growth towards the middle of the guidance range. Perhaps as importantly for the long term, we're making two substantial capability investments. First, we're expanding our brand development and design capabilities across much of the newly-scaled portfolio. We've fielded new product concepts and to test at a high pace with nearly 500 ideas tested since the beginning of the year through May, and the test results are encouraging. The second big investment we're making is in e-commerce. We are leveraging and substantially expanding the combined resources of both legacy companies into a new enterprise-wide, global e-commerce division. This standalone division has global P&L responsibility for all aspects of our Retailer.com, direct-to-consumer and pure-play businesses. The division is about 250 people strong, on its way to over 500 people by year end, with many experienced e-commerce leaders having joined Newell Brands from the outside. We believe e-commerce is already an advantaged capability for Newell Brands and with these investments we hope to widen the gap. So while we're mindful of the challenging retail environment and the potential for more retailer turbulence through the second quarter, our confidence in our delivery is grounded in the knowledge that we have a leading portfolio at brands, we have advantaged capabilities in innovation and design, a peer group-leading e-commerce organization, a long list of opportunities for international deployment and core distribution, the scale to out-spend and out-execute our competition, and a world-class team working on realizing the savings and cash benefits of the Jarden combination, and a track record of integrating new acquisitions with cost and revenue benefits quickly captured. This is a proven model and playbook that we've executed before and we're confident we can again. We believe Newell Brands represents a unique opportunity and this is a unique moment. We have the privilege of leading the development of one of the most exciting household good brand portfolios in the world, brands that hundreds of millions of times every day help make life better for consumers where they live, learn, work and play. These brands compete in large growing global categories, categories that are responsive to brand activity and innovation, categories that are unconsolidated, composed of subscale competition, with little to no private-label competition. As a result, these are categories with low cost of growth which creates the opportunity, with relatively modest investment, to deliver competitive performance. The scale benefit of the combination with Jarden and our new operating model unlocks substantial investment firepower, releasing $1.3 billion of synergies and savings, funding the creation of an advantaged set of capabilities and innovation in e-commerce, and increased brand A&P, while simultaneously driving margin improvement. We expect these investments, when applied against subscale competition, to drive consistently competitive core sales growth. And when coupled with expected normalized operating margins, increase to yield double-digit earnings per share growth compounded over the next five years. We're actively strengthening the portfolio, focusing our actions on categories with the greatest potential. With net proceeds from divestitures and cash from operations, we've reduced debt by nearly $3 billion as of the first anniversary of the Jarden transaction. And in early 2018, we expect to reach our targeted leverage ratio range of 3 times to 3.5 times, about one year ahead of our original plan. We also expect annual cash from operations to approach and then pass through the $2 billion per year threshold, reaching that milestone no later than 2019. With today's announcement, we've raised the dividend in line with our targeted payout ratio range of 30% to 35%, and we expect to grow the dividend in line with earnings going forward. We believe that the annual cash from operations after CapEx and dividends, coupled with increasing borrowing capacity from 2018 onward, will create further opportunity to complement the very competitive organic outcomes described in this talk with further M&A derived benefits. We expect Newell Brands to be one of the most transformative value creation stories in the consumer goods industry. We are clear in the path forward and could not be more committed in our drive to deliver. That is our unique opportunity and why this is our unique moment. Let me pass the line back to Eric to help facilitate questions.

Thank you. And we'll take our first question from Nik Modi with RBC Capital Markets.

Yeah. Thanks. Good morning, everyone. Couple of questions from me. Mike, about two quarters ago you talked about organizational screen. The organization is moving so fast through the transition. Where are we in that process? Is it starting to fade away in terms of people getting back, some of the screen being lifted, more alignment, more line of sight in terms of what they need to do? And then the second question, just from a macro perspective, many companies that have reported so far have indicated Jan and Feb are tough, though March and April look like they've improved. So I was hoping you can provide some context on that and where we are on this whole inventory destocking situation.

Yeah. The organization change, Nik, that I was referring to was really quite profound, particularly in the U.S. in the fourth quarter of 2016 and in the first quarter of 2017, we ramped the organization and got into a rhythm rent to speed and got into a rhythm of operating. So we're coming through that start-up curve in the first quarter and in that context we're quite pleased with the outcomes. The more distance we put to those changes, the better that rhythm will be and the better the execution will be. So that certainly is a variable that will help us over time. There are changes happening in different parts of the world. We focused in the U.S. first because that's, obviously, where the biggest revenue stream is and we've made those changes largely now. We've moved on and made changes in Canada and we will, over time, make changes in other parts of the business, but the vast majority of the change in our biggest market is behind us. With respect to category growth, category growth has been modest. I think it's very difficult for you guys to see that in the data that you look at, if you're pulling syndicated data for two reasons. One, syndicated data has never been a great predictor of our business because of the coverage issues associated with our channel breadth. And secondly, given the development of our e-commerce business at 10% of revenue globally, it's even higher in the U.S. And given the strong double-digit growth that's happening in that channel and given the fact that the syndicated sources don't really cover most of that, you guys wouldn't see what we're capable of seeing in our models. That said, growth has been modest and the thing that's driving our performance is share performance in the measured channels, which I mentioned, the rapid growth of our e-commerce business, and actually the international contributions. And the diversity of our categories is a real strength in moments like this, where we cover – we have a broad set of categories that compete in different context than traditional retail. So all of these things contributed to the very competitive performance we had in the quarter and will continue to contribute going forward. We don't expect and we don't see a material shift in category growth at this point, so our growth going forward is really going to be dependent on the things we do, which will be all about executing our growth priorities and continuing to develop and diversify our portfolio of channels to include the big e-commerce bet that we're making.

Great. Thanks.

We'll go next to Wendy Nicholson with Citi.

Hi. Good morning. Just looking at the four new segments you have, I'm curious as you think about over the next few years, obviously, Learn is already tremendously profitable, but of the Live, Work and Play segments, where do you think there is the greatest structural opportunity to cut costs? Can you rank those businesses, obviously, Learn at the very top and then the other three? Ultimately, what kind of margin should each of those segments generate or at least how much improvement do you think we can get out of each one? Thanks.

Yeah. Good question, Wendy. Look, I think everyone of our businesses will see their operating margins improve. Other may be challenging depending on what's going on with commodity dynamics. There may be moments where that doesn't step up. It could move one way or the other on us but each of Live, Learn, Work, Play will get the benefit of synergies playing through. We've talked about this before, about a third of those synergies flow to gross margin. About two thirds of them flow to overheads. So some of those will see pretty good gross margin progression based on sourcing benefits and procurement benefits flowing to margin and all of them will see the benefits of overhead reductions and those are pretty profound. We've got a good chunk of our synergies, cost savings, and Project Renewal savings in flight, but we have a lot still ahead of us, so I think all categories will see improvements. Sometimes you'll be able to see that in a quarterly result, sometimes you won't because, as you know, we manage resources, A&P resources, very dynamically. We don't let those resources get trapped in segments or in divisions, so we move them around through this hands-on sort of entrepreneurial approach to putting the money where the news is. And that can cause, in any given moment, a category operating margin to contract as a result of a surge in spending, but that's part of the strategy. Our scale leverage is in some ways applied when we tackle a category country sell and flood that sell with resources to establish a brand or build a bit of news out, in a way that our subscale competition can't. So that dynamic management of resources may lead to less visibility to what I've just said to you, and that in any given quarter we might step back. But, in general, with $1.3 billion of cost synergies and savings from the Transformation Office flowing into the P&L, every business should improve their operating margins over time.

Okay. Fair enough. And then just another question if I can, a quick one. The product line exits and SKU discontinuations or whatever you want to call it for this year. I mean, given where you are, kind of year-end of the integration, do you think that number needs to go up over the next 12, 18, 24 months? Are you finding – forget about just inventory reductions in the trade, but just as you think about the businesses, is there much more opportunity to streamline what you offer in terms of the range of SKUs such that that might negatively impact the top line as we go into next year? I know that's a long time away, but just order of magnitude. Thanks.

So great question. We will continuously work on reducing the complexity in this business. And there's an important working capital benefit associated with that and I think there's also a margin benefit associated with that. Our efforts to date have been focused in parts of the Work segment on Rubbermaid Commercial Products and within the Learn segment on our Writing and Creative Expression businesses. As we discussed in prior calls, the writing work, the complexity reduction for Writing will happen in two tranches, one that we just finished in this cycle of Q4, Q1 and another that will occur again in Q4, Q1 of 2017, 2018. But, all that said, we're not going to take a pass on growth because we're executing those changes. These are changes that will need to be planned and delivered through. So, we had some challenges in Commercial Products, if you go back to Q3 with that transition, but, in general, we ought to be able to grow through the change.

Fair enough. Thanks so much.

And we'll go next to Dara Mohsenian with Morgan Stanley.

Hey, Dara. Dara W. Mohsenian - Morgan Stanley & Co. LLC: Hey. Good morning. So can you discuss your near-term, top line visibility here in the balance of the year, particularly in Q2 given the difficult comparison and the tough environment in CPG in general? And to turn the question into more of a strategic longer-term question, it seems like, based on your comments, there was some U.S. retailer inventory pressure, but obviously the strong market share performance in your portfolio sort of offset that. So can you just give us an update on the level of top line responsiveness you think you're seeing in your business to higher spending and marketing and R&D, both on the heritage Newell side where you're years into the higher spending, but also any initial thoughts on the Jarden business so far and its response to higher spending, or if that's more to come going forward? Thanks.

Thanks, Dara. It's a good question. We expect more headwinds in the second quarter connected to the retailer transitions that are occurring. We were successful in overcoming that headwind in Q1 as a result of the diversity of our portfolio and channels, as a result of the share gains in modest growing categories, as a result of the broad-based growth in the international contribution, and as a result of the tremendous surge in momentum we have in e-commerce. So those four variables contributed to our ability to deal with the acute issue that's happening – was happening on inventories in the U.S. That algorithm is available to us and we continue to expect it to serve us for the balance of the year. Our momentum on legacy Newell Rubbermaid businesses with brands and innovation is contributing to the market share growth, but we also have good growth on appliances in reasonably healthy categories. So there are pockets of growth that cut across the entire portfolio that are fundamentally driven, despite the inventory pressures that are in the system. As I said, we expect that to continue into Q2. We don't know for how long, but we expect it to continue and we're assuming it does in our planning. These things are not as – these types of issues are not as smooth and predictable as you'd like them to be, but we've got that built into our thinking. With respect to heavy up spend, we're actually not spending at heavy up levels yet. We expect Q2 and Q3 spending to be up versus prior year as a percentage of revenue as we come into high seasonality for many of our businesses, but our market share growth in the first quarter was not spending derived. It was derived from new products, strong new products, good sales execution in the face of turbulent headwinds, and the other three variables; diversification, the channel and portfolio geography and e-commerce. Dara W. Mohsenian - Morgan Stanley & Co. LLC: Okay. That's helpful. And then on the e-commerce side as a follow-up, did you see growth accelerate significantly in the quarter versus recent trend if you look at the last few quarters as you put some of the learnings from the Jarden side of the business to work or with the new organizational structure and head count you mentioned you're bringing in? And if I could slip one last one in, the synergy number was really strong in the quarter, greater than $115 million. So wouldn't that imply upside to your $300 million full year synergy number? Thanks.

Yeah. I think I'll take the first question, and Ralph, you can take the second. But on e-commerce, we have – both companies, both legacy companies had strong histories and had made significant investments in establishing an approach to e-commerce. And what we're doing is leveraging that history, those teams, and now scaling it in an integrated enterprise-wide global capability. And we saw tremendous growth in both pure play and Retailer.com in the quarter and very good growth in our D2C businesses. Our focus is on pure play and Retailer.com. That's where our energy is going. We in fact just came back from our fourth annual Top to Top at Amazon, and we're having ongoing conversations with the Targets and Staples and the Walmart dot-coms of this world about how to scale our presence. We're learning as we go. I mean, the growth results were extraordinary. The growth as a percentage of revenue is more than two times, at least in my experience, more than two times the size of most fast-moving consumer goods. So the channel contribution to the company is quite large in the U.S. more than 10%. And we're learning, but we're learning as we go. We executed a really brilliant thing at Amazon, a corporate event with 500 different items profiled in the Newell Brands day, a web takeover at Amazon in January, which really worked. And so we have tremendous opportunity here both in getting the right assortment available, in the geographic expansion of our presence where our retail partners are, and so we expect to be able to continue to push this and over time accelerate the growth contribution. As you know, we expect 50% of the growth between now and 2021 to be derived through e-com, that by 2021, we're north, probably north of 20%, maybe as high as 22% of our total revenue. And this scale in this channel positions us well to deliver differentiated growth rates versus our peer group of companies. And so strategically, we know this is critical. The two planks, really three planks that will drive the company going forward are brands and innovation, the playbook we've executed in the legacy Newell Rubbermaid story, e-commerce development, the story that's unfolding as we speak with a big differentiated bet made there, and geographic deployment, international geographic deployment. These three things are the big levers available to us as we set up the future. And you should expect us to pull them in the right way, in the right sequence as the organization is ready for us to do so.

And, Dara, just regarding your question on the flow of synergies, you are right, the way it looked in the first quarter, we were above what I'll call an average run rate for what we projected, which as Mike said, we're right on track to be over $300 million of synergies and renewal savings this year. But the principal reason in the first quarter you see the number elevated is that in the first quarter, related to Jarden, there was a lot of executive management costs that we are now, we're saving and we're realizing those in the first quarter. So that will balance out a little bit more evenly over the course of the year. Dara W. Mohsenian - Morgan Stanley & Co. LLC: Okay. Thanks.

And we'll go next to Bill Chappell with SunTrust.

Thanks. Good morning. Hey, just going back to the commentary maybe six months ago about how much of the business you were either going to divest or exit, where are we on that? It seems like most of it has gone towards divest and you haven't really exited a whole lot of that business. Is that the right way to look at it in terms of going forward on the effect on the P&L and core sales?

Yeah. We've been able to sell many of the assets we were worried we wouldn't be able to. And that's worked out well for us. So as you know, there are two bigger divestitures left to draw to completion. One is the winter sports business and there's a process in full flight around that. The other is our heaters, humidifiers and fans business, which we're just ramping to begin. Our assumptions are that we can move quickly on heaters, humidifiers and fans, and that we get the winter sports business wrapped up sometime in Q2. And then there's some smaller brands that we're also working on, but they really are not going to be material in the scheme of things. We've absorbed a bunch of headwinds on the business over the last year that we haven't really spoken a lot about and those are embedded in our core sales performance with respect to either geographic exits of categories or individual product families. But those things are largely behind us. We'll always be weeding the portfolio and so you shouldn't expect us to not have those things ahead of us, but I don't think any of them will be substantial enough to really talk about with you guys or call out.

Well, is there a way to quantify? Like, I'm looking at sales growth this year, how much now exits will impact that core.

Yeah. I don't think that they will be a material impact on our – material headwind in the business. The bigger challenge in the business as headwind is the retail landscape, which we've talked about. Without that, you would've seen different outcomes in our core growth numbers and that would have been an easier bridge back to our prior commentary.

Okay. And then...

But, I really don't want to dimensionalize specifically how much the inventory effect was because I've consistently said that we've got to work around that. That's just the way it is in the industry these days as consumers shift channels and we need to reach consumers where they shop and that headwind is something we need to accept and overcome.

Okay. And then just a couple of specific, maybe a further update now that we're a quarter into the writing instrument launch in China, where you think that's going. And also on Yankee Candle, since Mother's Day is, as a reminder, this Sunday. Maybe how April and early May have gone, do you feel like that's a good testament that Yankee Candle is in good hands or in a good place after a turbulent holiday season?

Yes. So as I said in the script, we've taken this personalization platform into every Yankee Candle store in the U.S. So we've now created these kiosks in-store where you can do personalization. We've also, and we're in the midst of bringing WoodWick, as a brand, in store, so that we've broadened the brand footprint within our Yankee Candle stores. It's too early to know whether, how this will play out on the full year. I will tell you, some of the feedback we're getting from our store associates with respect to the personalization platforms is, it's extraordinary how excited people are and the kind of testimonials we're getting. You pay a premium price to do customization and personalization in-store but the kind of engagement is really promising. It's too early to declare whether that's a function of timing related to Mother's Day or whether that's going to be a sustaining impact for – a positive impact for us. I'm convinced that there will be a word-of-mouth effect that will help traffic into the stores over time given the amount of emotion you read in some of the testimonials we're receiving. But that's still to be proven. I'm also quite confident that WoodWick in-store is going to be an added value addition. All that said, I think we will continue to have pressure on retail. Our guidance assumes negative comps on retail and our model assumes we build a business, a growth business, on Yankee Candle through the wholesale footprint trying to replicate the per-capita consumption metrics we've got in the UK, which interestingly enough is the strongest per capita development of the business. And so there's tremendous opportunity for North American wholesale distribution. Even if it comes at the expense of our own retail stores, we are going to make Yankee Candle available to consumers where they shop and we've not really begun in Canada beyond one retail partnership and there's opportunity across Europe for the brand. So we're very optimistic about the future of our Home Fragrance business. We've got a lot of people working really hard to kind of build this platform out. I think personalization and e-commerce will be a big part of the story over time and we want the brand presence and availability to be within arm's reach of the consumer. So there's a lot of work happening here, but the one thing I will say is that you should not expect us to get the positive comps and we don't, either in year expect for positive comps with retail no matter what we do in that setting and our strategic plan assumes a ratcheting down of our retail presence over time as consumers shift online with their purchases. So that story is going to play out, we're very confident about the outcome and we're excited to continue to invest in the business to be able to deliver that.

And we'll go next to Kevin Grundy with Jefferies.

Thanks. Good morning, guys, and congratulations on the quarter. First one Ralph, on cash flow, and then I have a follow-up question on the core sales guidance. But, with respect to cash flow, Ralph, thanks for the guidance there looking out to 2019. I think that's helpful for people, with respect to reaching close to $2 billion a year by 2019. A few questions there. Can you confirm that all cash costs associated with the Jarden synergies are included in that? Second question would be, is there any working capital benefit? And then the third piece maybe Mike, this one is for you, neither the near-term annual comp or long-term incentive include cash or ROIC, if I'm not mistaken it's normalized EPS, core sales, normalized EBITDA and TSR. Is the inclusion of cash flow or ROIC something you think the board would consider? And then I have a follow-up on the core sales guidance. Thanks.

Yeah. First, the numbers include all results of operations, so cash flow doesn't get adjusted for anything. So that would include any type of costs related to integration and in particular would reflect the stepped-up investments we're making to ensure the delivery of the $1.3 billion that Mike had guided to, so that's clearly in there. And then in terms of working capital, very, very modest improvement in working capital. We're really focusing the near and here on the organization and the stability and to get the business on the continued momentum that we're building, but limited working capital is counted – improvement is counted in that number. So we would view that as probably an upside as we get traction on that over time.

And then with respect to the question about cash flow or ROIC in the comp structure, I think it's an important topic and it's one that we're discussing with the board for 2018 and beyond. My orientation is to drive towards cash flow metric as part of the long-term comp. It will keep the pressure in the system to deliver through that $2 billion threshold which we think we crossover in 2019 and obviously it's a big part of the story, perhaps an underappreciated part of the story given the transition year we're in and the cash taxes associated with the Tools gain. But this is going to be – this plus the steady, consistent competitive levels of core growth, this is the story and this is the thing that adds optionality to the value creation element of the story. And so we're excited by it, we're energized by it, we want to deliver it, and I think you're right, I think that we should in some way be held accountable for it through some of our, either our short-term or long-term comp. The board will make that call. It's actually on the agenda for tomorrow's board meeting believe it or not. But, we'll see how that all plays out over the next couple of board meetings. It won't go into effect obviously until 2018. We made the judgment this year, as you know, to flip gross margin percentage into the mix so that we created a sharpness of accountability in that space and I think that will serve us well also, but I think your point is well taken. You had a follow-up on core sales.

Yeah. Thanks for the comments there on cash flow. So, Mike, the follow-up is, it seems like category growth has certainly slowed not just in your business but across the board but you maintained guidance. So you talked about a bunch of this. But – so implicitly your outlook for the underlying business and the market share gains that you hope to achieve has gotten better. So a couple of things; what specifically does get better? And then, Mike, I think you talked about modest category growth, is that flat? Is that closer to one to two? So just trying to better understand what gets you to 2.5% to 4% in the balance of the year and is 4% attainable? If category growth is something closer to flat to up 1%, is 4% even on the table? So any commentary there would be helpful. Thank you.

Yes. So, good question. So we guided towards the midpoint of our guidance range of 2.5% to 4%. We delivered 2.5% in the first quarter. Obviously, we delivered it in a slightly different way than we anticipated given the inventory headwinds in part driven by strength in international, in part driven by diversity of categories in some unique businesses that performed quite well and in part driven by a better-than-expected e-commerce division performance and strong shares in the core. I would assume, in the first quarter our market growth was effectively flat and so our growth came in that – our market share growth came in that context and I'm speaking to the U.S. We would expect some of that to be tempered in the back half of the year so we should get some – some of the headwinds will be tempered, so we should get some category growth through the balance of the year but we're not counting on it. So, our growth has to come through sustained outperformance in e-commerce, good contribution for our international markets and continued strong share performance. In the most recent 12-week period our market shares in the U.S. were up 41 basis points and the most recent four-week share period, our market shares were up over 70 basis points. So those are the types of things, that type of momentum is what's going to be required in a more sustained fashion to deliver towards the midpoint of the range. Implied in the midpoint of the range is a stronger back half than the first half. I think we continue to have headwinds in Q2 from an inventory perspective, but we're hopeful that we do a little better in Q2 than we did in Q1, but we're still calling the midpoint of the range and we see – and the comps are tough in Q2, but the comps get easier in the back half of the year and we should see some progression through that period. Do we see a 4%? I don't know. Is it possible that in any given quarter we deliver 4% growth in this environment? Possible. Is it probable? Probably not. It's a tough environment out there, but do I think we get towards the middle of the range? Yes I do.

Okay. Thank you very much. Good luck, guys.

The next question is from Jason Gere with KeyBanc Capital Markets.

Okay. Thanks, and congratulations, guys on a good quarter. I guess two questions. The first one, if you could talk about maybe the confidence in the innovation pipeline for 2018. So I'm just thinking about the longer-term 3% to 5% organic sales. You talked a little bit about some of the revenue synergies. So I was just wondering, I would think 2018 is when you would see more of the combined R&D efforts really coming together. So maybe if you could talk, I guess, first about some of the differentiation that you see in the innovation pipeline for next year, as well as maybe some of the additional channel expansion opportunities on the revenue side that get you within that 3% to 5% as we think longer-term. That's the first question.

Yes. So, Jason, as we've said, the gestation period on new ideas is anywhere from 18 to 24 months, but we should see these ideas flow in, and every project is an idea, so we should see these things flow in in a layered way where we get improved innovation contribution to growth, probably starting from about the middle of next year onward, if you look at that timetable from idea to market. The good news is we've been spending a fair amount of money on research through 2016, into 2017. In my comments, I mentioned that we've tested 500 ideas since the beginning of the year through the end of May, operating roughly at about 100 ideas a month, which is great. You've got to have a certain idea flow at the front end of the funnel to get accelerated outcomes at the rear end of the funnel because many of these ideas fail, many of the products don't fulfill once they start to be built against the concepts. And so you've got to have that sort of algorithm set up properly. We do. It's too early to declare what the core sales impact will be. But we've done this before and we've seen the results of that. If you go back and look at the period from 2013 through middle of 2015, into back half of 2015, you see the momentum in the legacy Newell Rubbermaid business. A big chunk of that was related to the branded innovation work that we did. So our confidence is grounded in the fact that we've done it before, and the fact that we are seeing encouraging test results. But it's a little premature for me to declare exactly how that manifests itself in core sales. It's going to be dependent upon the progressions of the ideas through the funnel, the kind of retailer excitement we were able to generate, the kind of money we've got available to us in the P&L to be able to support those ideas. But that'll play out over the next few months. Our brand development and our marketing planning work for 2018 gears up here over the next couple of weeks and is in full flight by the middle of July. And maybe we'll offer some more perspective towards the end of the summer on exactly what we think the implications are for 2018. Of course, all of this happens in a context, and we need to be mindful of the context in which we're executing. And, hopefully, the experience we've had in the beginning of this year, with respect to the retailer environment, subdues, and gets into a more normal state. And if it does, then things should play out as expected.

Okay. Great. I appreciate the color. And, I guess, the second question, is just on – within the 2.5% to 4% you're looking this year, what do you think the impact is of like, I would call it net pricing? So you talked a little bit about some input costs but, obviously, currency is lessening, so maybe the ability to take pricing versus I guess, some of the support you have to give to your retailers as the shift to online starts to pick up, just the balancing of merchandising dollars that would flow as kind of gross-to-net. So I was just wondering if you could talk maybe broadly or however you want to talk about it, but just maybe that subject matter. Thanks.

When you look across the portfolio, there's a lot of different moving pieces in here. In aggregate on the year within the 2.5% to 4%, there's not that significant a benefit from pricing when you look across the portfolio. There's some places where we have priced, particularly where commodities have moved, but then on the other side we're ensuring that we're also driving the growth and distribution on the business that we have. So, in aggregate, not a significant impact on the 2.5% to 4%.

And as the environment tempers a little bit on the transaction forex front, while it's still negative, it's not as negative as we had in the plan. It takes a little bit of the pressure off. That said, resin costs are unfavorable relative to plan, and so these things sort of are washed out against each other in the year. But we've done a lot of pricing in that period from 2013 through 2016, connected to the strengthening of the dollar and, in general, we have the capacity to price, particularly in Latin America and in the emerging markets in general. UK has been tougher and we're grateful that the FX environment has moderated a little bit and taken some of the pressure off of our gross margins in that situation. So, but on balance, Ralph's comments are dead-on that we don't have a huge amount of pricing built into this year's plan, and the tempering FX environment helps offset some of these other pressures through the P&L. And it remains to be seen how far that story plays out.

Okay. Great. Thanks, guys.

The next question is from Lauren Lieberman with Barclays.

Thank you.

Good morning, Lauren.

Hi. In terms of inventory destocking, two kind of buckets of questions. First, as you mentioned on the commercial distributor channel, I wanted to – I just honestly know a lot less about that business, so are those changes demand-driven? Is it channel shift? So anything you could share there would be great. And then on the more traditional retail consumer-facing businesses, interestingly Appliances was not called out as one of the businesses that really suffered this quarter, and that had been my expectation given the pressure you saw in Q4. So if you could talk a little bit about if in fact there was an inventory destocking in Appliances. You mentioned increased merchandising. If that was new distribution in club? And then also, the inventory destocking around Coleman and fishing. It's a seasonally really small quarter for those businesses, so I was curious if that was kind of clean-up work, if it was left over inventory, anything you could share on those would be good too. Thank you.

Yeah. Sure. So the inventory reduction impacts were broad-based. Some of those are masked in our numbers because we had really strong performance in certain other aspects of the business. So, even in writing, we saw in the distributive trade pressure on pencils and pens. But we had great momentum on markers behind Sharpie Fine Art, behind the EXPO Ink Indicator, geographic expansion of Sharpie to Mexico and France. We've got a lot of things going on in these businesses. But pressure, even within writing now because of the momentum on markers, because of the continued momentum on glue connected to slime, we were able to overcome that. The good news is that these things are now behind us and eventually we lap these scenarios as we come into 2018 which will serve us well. In the distributive trade, we saw pressure across the distributive trade for a couple of reasons. One is just basic inventory pressure in that channel. But you have to ask the question why. And what's going on there is similar to what's going on in retail, which is the B2B e-platforms are impacting those channels. And so the same dynamic that's playing out in brick-and-mortar is playing out in the distributive trade. And so over time, we will confront that and adapt to it in the same way that we have on the retail side. Do we expect this? On pure fishing, clearly, there was a bit of rebalancing and reduction going on there. And some of this is timing related given the new algorithms that are in place at certain retailers with respect to ordering patterns. On appliances, as you recall, we saw a $24 million order that we didn't get in the period between December 15 and December 31 in the fourth quarter, which in effect was an inventory impact. We didn't see inventory really being a huge issue through Q1, and we've got very good momentum in appliances. We see category growth in that business, and we see share growth in that business right now. Now I know some others have talked about categories presenting an issue. It depends on how you define the category, and if you take particular product families and define the category that way, it can lead you to one set of conclusions. If you look at it holistically, it can lead you to another. But we saw both category growth and share growth for us in the first quarter in appliances with some really nice momentum on FoodSaver, some nice momentum on Crock, some nice momentum on Oster, and some challenges in beverages on Mr. Coffee.

Okay.

And also Sunbeam, what am I talking about. Sunbeam had a great quarter on our heating platform. So that's good news. And the team's terrific and they're focused on how to sustain that momentum into the back half of the year.

Okay. Great. And then just one last question on capital allocation. So surprised and certainly not sad to see the dividend increase come so early. How are you thinking about share repurchases I mean now that debt levels look like they're going to come in much better than originally expected? Do share repurchases maybe turn on a bit faster than previously communicated?

Lauren, our capital priorities really haven't changed in terms of deleveraging, investing in the business, and frankly, we think over time as we get to the leverage range that we are expecting be in early 2018, we think there's a lot of opportunities on inorganic growth through M&A and as we look at those opportunities, we frankly put those ahead of share repurchases at this point in time.

Yeah, I think our track record on things like Elmer's or Contigo or Baby Jogger, these types of acquisitions that happen in the core and our ability to really quickly capture the SG&A synergies and then put it into our operating model and drive growth acceleration. I think this is the value creation machine that we created with bolt-ons in the core. And there's a lot of opportunity out there to complement our organic agenda with that type of use of capital. We may over time want to manage share count flat, so as equity gets granted, we may buy back shares to just hold the share count so that doesn't become a headwind. But I doubt in the very near term that we would use capital that way because we see so much opportunity for this complementary use of capital to scale our presence in these core categories.

Okay. Great. Thank you so much.

And we have time for one more question and that question is from Andrea Teixeira with JPMorgan.

Hi, Andrea.

Yeah. Hi. How are you? Good morning. So thank you for taking the last question. So the last question would be if you can elaborate more on your direct-to-consumer capabilities. Are you fulfilling yourself? It seems like from your comments that you had in the prepared remarks about baby in Canada and also more push in the U.S. So if you can please elaborate how much it represented on the quarter from this direct fulfillment and out of your 10%. I don't know if you include that in your e-commerce, 10% that you mentioned, and is it margin dilutive against 3P, third-party e-commerce? So I would love to get more of a sense of how it is evolving. Thank you.

Yeah. So direct-to-consumer is the smallest part of our e-commerce numbers but it is included in our e-commerce numbers. The two biggest businesses with direct-to-consumer platforms are Yankee and Jostens. But we also have a nice business with Coleman and we have a building business with Marmot and we've got some interesting businesses unfolding under the Coleman brand. And so there are multiple platforms. We're in the moment, looking across the entire enterprise and looking for a common back-office approach and fulfillment approach. Today it's very different business by business. Our e-commerce team is working through the mechanics of how to build that business in a profitable way going forward. But to be clear, the vast majority of our results are being driven by progress in pure play and in Retailer.com. And there are a few exceptions to that with good momentum on Yankee. But I think we have a lot of opportunity in our D2C platforms to both strengthen the way we merchandise our brands and then also improve the way we fulfill demand. And we're looking to scale those activities over time. But we can talk more of that as the teams develop their perspective and their approach. Right now, just to be clear, our e-commerce business is margin accretive to the company, not necessarily at gross margin, but down through the balance of the P&L. Because as you think through the expense lines in overhead, there's a relatively low selling expense as a percent of revenue in our e-commerce interfaces relative to our traditional route to market. And so that's where the benefit comes. It's below the fulfillment line in our overhead structure. So more to come on this over time as the teams really ramp. We'll figure out a mechanism by which to get the group in front of you. One of the things we're thinking through is the Investor Day in late – in mid-Q4 and we certainly will profile e-commerce there and walk you through all three platforms.

Thank you, Mike. This is very helpful, and congrats, again, on the results.

Thank you very much.

Eric, I think we're done. I want to just, in closing, make – give a call out to my team. I think this has been an extraordinary six months, both the profound change and executing through the change and I couldn't be prouder of everybody's effort and contribution to performing while we transform. And I think there's a lot to be proud of. A lot of opportunity is still ahead. We embrace this philosophy that good enough never is. And so we're hungry for more and we're excited about the prospect of delivering it. But in the moment, congratulations to everybody on my side. Thank you.

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