Newell Brands Inc. (NWL) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to Newell Brands Third Quarter 2017 Earnings Conference Call. At this time, all participants are a listen-only mode. After a brief discussion by management, we will open up the call for questions. In order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. 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, SVP of Investor Relations. Ms. O'Donnell, you may begin.

Thank you. Good morning, everyone. Thank you for joining us for Newell Brands third quarter conference call. On our call today are Mike Polk, Newell's CEO and Ralph Nicoletti, our Chief Financial Officer. During the call, we will make statements about our expectations for future financial and operating performance. These forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties. I point you to our press release issued today and our most recent SEC filings for a list of some of the most important risk factors that could cause actual results to differ materially from our forward-looking statements. We do not undertake to update these statements. I'd also like to point out that we will refer to certain non-GAAP financial measures to the extent available. A reconciliation of the non-GAAP financial measures to comparable GAAP measures is shown in the press release and is available on our website. Thank you, and now I'll turn it over to Mike.

Thank you. Nancy. Good morning, everyone, and thanks for joining our call. This is my 25th quarterly earnings call as Newell's CEO and we clearly have not had a quarter like this before. The third quarter was chock-full of contradictions. On the positive side, we had broad-based market share growth in our most important U.S. market with share growth on writing instruments, glue, labeling, outdoor and recreation equipment, beverages, fragrance, baby gear, food storage, fresh preserving, vacuum sealing, fishing and team sports. We also had strong double-digit e-commerce growth across the entire portfolio and another quarter of strong cost synergies and savings with a new organization that's coming together and growing as a team. On the opposite side, we had force majeure in our largest supply network, driving inflation with no time to price to recover margin. We had a top customer bankruptcy, forcing a future re-plan on one of our best performing businesses. We had unrelenting retailer inventory destocking, creating a headwind for revenue as our retail partners adjust to slowing market growth and changes in shopping patterns. You name it, we experienced it this quarter. From a selling perspective, what started out as one of our best quarters in a long while in July, took a sharp downward turn in September, resulting in just over $100 million revenue miss versus our expectations, with the big drivers being our U.S. Writing and Appliance businesses. Obviously, this is a disappointing outcome, and as CEO, I take full responsibility for these results. To be clear, there's nothing in our Q3 experience that changes our perspective on our ability to realize the value creation opportunity inherent in Newell Brands, and we are focused and undeterred in our commitment and drive to do just that. That said, we need to accept the retail environment for what it is, recognizing the (4:04) this will create on growth going forward and adjust our work plans to accommodate that marketplace reality. We will commit to consistently grow ahead of our markets, continuing to build market share in our key geographies, customers and channels. We will further heighten our work on cost and pricing to accelerate margin development, and we will aggressively reduce working capital in order to strengthen the delivery of cash. We will do this without compromising on our investment in innovation, brand building, e-commerce and design. In the U.S., we've had a good market share performance. We delivered sell-out growth well above our markets with POS up 3.5%, yielding market share growth of 65 basis points. So our marketing activity and our work on brands, innovation and e-commerce appears to be working in our largest market. The disconnect is obviously that sell-out is far above sell-in, with core sales in the U.S. down 70 basis points despite 3.5% sell-out growth, as retailers pullback on order rates and rebalanced inventories late in the quarter. This was particularly true in those retail channels where business models have been disrupted by shifting shopping patterns between brick-and-mortar and e-commerce. The impact was most significant in categories with relatively low e-commerce channel development. The sales read-through to earnings compounded with the negative mix associated with Writing's contribution to the miss, drove the normalized EPS shortfall versus expectations. Writing had the most significant impact on the quarter. We planned our writing instrument business to experience market growth equal to last year's Back-to-School of over 5% with an added benefit from share growth. Unlike other stationery categories such as paper, writing instrument e-commerce penetration in the U.S. is relatively underdeveloped, at only about 8% of the total category. As a consequence, the gross mix benefit of e-commerce was insufficient to offset brick-and-mortar market declines, resulting in flat writing instrument market growth in the quarter. Despite continuing to build market share by just over 40 basis points, the effect of flat markets compromised sell-out performance versus our expectations. In this context, a number of retailers canceled late September Back-to-School replenishment orders and we will not get most of those orders back in the fourth quarter, as the channel continues to reset inventory levels. As always, there is wide divergence in retailer performance in Back-to-School. Our revised outlook for the Writing contemplates continuing challenges, particularly in the office superstore channel. We will work together with our retail partners to ensure our spending is in line with their capacity to grow, and our funding is reaching the end consumer in the form of consumption-based programming. Beyond Writing, our Appliance and Cookware business struggled in the quarter with market share declines and market weakness in a number of core product categories. Despite this emerging hotspot, we're confident we can create sequential improvement in this business. Through 2017, we've been investing to build a bigger, better Appliance and Cookware innovation funnel. The brands are very strong and the ideas look quite promising. We've accelerated two big launches into the fourth quarter of 2017, and have a significant activation program in place on Crock-Pot. We also have a significant opportunity to strengthen our e-commerce presence on Appliances as we are underdeveloped versus our potential. Strengthened innovation and broadened e-commerce impact are what the business needs and these are core strengths of the Newell model. On balance, the rest of our businesses performed pretty well in a difficult environment. Four of five segments and 10 of 15 divisions grew core sales. Our Latin American business grew over 11% and our Asia-Pacific business over 6%. Our top five customers, which represents about 30% of our global business, grew over 8% in the third quarter. E-commerce, which now represents 11% of our global business, grew strong double digits once again. And many of our divisions have excellent momentum. Baby grew over 10% in the third quarter, Waddington, Fishing, Food and Team Sports all grew mid-single digits with Food and Fishing making nice recoveries from the first half of the year. Importantly, the Yankee Candle transition continued to progress well and we're confident it will lead to accelerated performance with broadened distribution in North American wholesale and continued renovation of our retail platform, with new personalization ideas for the holidays, the opening next week of the new pop-up concept store in Soho in Manhattan and the related launch of a direct to consumer micro-site that brings all of our brands together in an innovative new format for the holidays. On the savings front, we continued to realize cost synergies with an incremental $86 million saved in the quarter. While those benefits, coupled with the lower than normal tax rate, were partially offset by the read through on the sales miss, commodity inflation, higher A&P and the absence of about $50 million of pre-tax earnings associated with divestitures, we still delivered double-digit earnings per share growth. So in a tough environment, our third quarter results missed the mark. We take accountability for this. We did deliver, however, sell-out growth ahead of our markets, resulting in a U.S. market share increase of 65 basis points and we delivered 3.5% point-of-sale growth. Sell-in continued to be disconnected from sell-out, as market growth decelerated and retailers adjusted their inventories and order patterns. Many of our businesses performed well through that turbulence with our challenges largely focused in U.S. Writing and Appliances. While our start to the fourth quarter looks very much like our start to the third quarter, with solid growth in the first month of October, we have reset guidance for the balance of 2017 to reflect an assumed negative impact associated with the Toys"R"Us restructuring on Baby, and continued Writing headwinds in select customers. Our revised 2017 full year guidance is for net sales growth of over 11%, core sales growth of 1.5% to 2% and normalized EPS of $2.80 to $2.85. While we expect to continue to build share and consistently grow ahead of our markets, we now believe modest market growth and retailer headwinds will persist into the foreseeable future. We will more sharply align resources to winning customers and channels in this context in order to generate the greatest growth yield on our investment. We have delivered the cost synergies and Renewal savings we committed to deliver, having achieved over $280 million of incremental savings year-to-date and continue to expect to deliver over $300 million next year. We're mobilizing to challenge our cost structure even further given more modest growth expectations, while simultaneously creating a new work stream to drive down working capital over the next 15 months, with the objective to strengthen earnings and cash delivery, effectively increasing the prioritization of margin development and cash delivery over that timeframe. We will continue to invest to build our brands, to bring strong innovations to market and to strengthen our e-commerce operations, recognizing the strategic leverage in these advantaged capabilities. And we will continue to allocate capital, primarily to debt repayment as we drive to reach our target leverage ratio range by the end of 2018. Despite our challenges in the moment, we're confident that Newell Brands' investment thesis is intact and our transformative value creation opportunity is all still to play for. The board shares this confidence and has approved $1 billion share repurchase authorization through 2020. Let me pass the line over to Ralph for a quick run through the numbers and then we'll open the call to questions.

Thanks, Mike, and good morning, everyone. Starting with the key highlights, our core sales grew 0.4% and normalized EPS grew 10.3% to $0.86 per share. We captured about $86 million in synergies and Project Renewal savings during the quarter, which only partially offset the impact of input cost pressure particularly resin, unfavorable product mix, higher spending behind A&P and e-commerce as well as the lost income from the businesses that we have divested. We are lowering our earnings outlook for this year to a new range of $2.80 to $2.85 per share. Regarding operating cash flow, we expect the effect of lower sales and earnings and the related temporary effect on elevated inventory levels will result in cash flow from operations to be in the $700 million to $800 million range. Importantly, as we focus on margin development and working capital improvement, we expect to achieve our target leverage ratio by the end of 2018. Turning to the details, third quarter reported net sales were $3.7 billion, a 7% decline versus last year, primarily due to the divestiture of the Tools, Winter Sports, Totes, Teutonia, Fire Building and Cordage businesses. Foreign exchange was a modest tailwind. Core sales grew 0.4% as strong results in Baby, Food, Waddington, Fishing and Team Sports were largely offset by much softer than anticipated Back-to-School season, which impacted our Writing division as well as soft performance in our Appliance and Cookware division in the U.S. Reported gross margin was 34.5% compared with 32.2% in the prior year, with a year-over-year improvement largely reflecting the absence of last year's $146 million charge for the inventory step-up from the Jarden acquisition. Normalized gross margin was 35% compared with 36% last year as the benefits of cost synergies and Renewal savings were more than offset by input cost inflation and unfavorable mix. We were unable to take immediate pricing to mitigate the impact of elevated resin and logistics cost in the aftermath of Hurricane Harvey. However, we have now taken pricing actions, which should help offset margin pressure from commodity increases as we move into 2018. Reported SG&A expense of $906 million represented 24.6% of sales as compared to last year's ratio of 23.7% with the year-over-year increase driven by higher integration and acquisition amortization costs, as well as incremental spending behind e-commerce, advertising and promotions. We also recorded a $15 million bad debt provision during the quarter as a result of the Toys"R"Us bankruptcy filing. Normalized SG&A expense was $737 million, or 20% of sales versus 20.6% of sales in the year-ago quarter. The 60-basis-point year-over-year improvement in the SG&A to sales ratio reflects the benefit of cost synergies and Renewal savings, which helped offset the impact of incremental investments in advertising and promotion and e-commerce. Reported operating margin was 8.8% of sales compared with 8.2% in the prior year. Normalized operating margin was 15% compared to 15.4% in the prior year. Interest expense of $116 million was below last year's level of $125 million, reflecting the lower debt balance. We continue to forecast 2017 normalized interest expense of approximately $470 million. The reported tax rate for the quarter was a benefit of 41.5% compared with the 6.8% rate in the prior year, principally due to the recognition of expected discrete tax benefits within the quarter along with the effect of geographic mix of earnings. The normalized tax rate was 4.1% compared with 22.5% in the previous year. We now forecast the full year normalized tax rate to be about 21%. In the third quarter we had a weighted average of 492 million diluted shares outstanding, up from 486 million in the prior year due to the shares issued in early July as part of the settlement of four dissenter lawsuits. We expect the full year share count to be at or around 489 million shares with a fourth quarter share count of 492 million. Reported earnings per share were $0.48 compared with $0.38 last year. Normalized earnings per share were $0.86 compared with $0.78 last year. Moving onto our segment results, net sales in our Live segment reached $1.5 billion, an increase of 2.3% versus last year. Core sales rose 0.6%, a strong performance in Baby driven by the continued momentum in U.S. baby gear, Food, with solid growth in food storage, and Home Fragrance wholesale and e-commerce businesses was partially offset by soft results in Appliance and Cookware. The Learn segment generated net revenues of $642 million, which represents a 0.7% year-over-year increase. Core sales grew 0.5% with growth in all three businesses, but a significant shortfall versus expectations in Writing, as Mike discussed. Net sales in the Work segment were $738 million, rising 1.6% versus the year-ago quarter. Core sales increased 1.9% with both Waddington and Consumer and Commercial divisions driving this outcome. The Play segment contributed net sales of $611 million, which represents a 2.4% increase versus the prior year. Core sales improved 2.3%, reflecting growth across all three divisions; Outdoor and Recreation, Fishing and Team Sports. Net sales for the Other segment were $204 million, declining 62% versus the prior year, reflecting the divestitures of Winter Sports, Tools, Teutonia, Lehigh and the Fire Building businesses, which were completed earlier this year. Core sales declined 10.6% with both Home & Family and Process Solutions divisions down year-over-year. In the third quarter, we generated $183 million of operating cash flow. The year-over-year decline in cash flow reflects absence of profits from the divested businesses, higher cash tax payments, primarily related to gains on disposals and costs related to the delivery of synergies, as well as higher working capital levels, particularly on inventories. While we plan for inventory-building categories with new product launches and where we were capacity constrained, the top line shortfall relative to our expectations resulted in significantly higher inventory days. Accounts receivable was also adversely affected by the Toys"R"Us bankruptcy. While we expect to recover a significant portion of our exposure, this impacted our Q3 cash flow. We are taking steps to reduce inventories and expect to make progress in the fourth quarter and over the next year. We returned $113 million to shareholders during the quarter through dividends. In September, we reinstated our stock repurchase program, which has $256 million remaining under the current authorization. We are also pleased to announce that our board of directors has approved a new, three-year stock repurchase authorization, which enables the company to buy back up to $1 billion of its shares plus any rollover of unused authorization from 2017. Although this repurchase authorization provides us with additional flexibility for capital deployment, we remain committed to deleveraging our balance sheet and are on track to achieve the leverage target of 3 times to 3.5 times by the end of 2018. I'll now turn the call back to Mike.

Thanks, Ralph. While we take our responsibility to do what we say very seriously and are disappointed in our third quarter outcome, we are equally undeterred in our drive to achieve the full potential of the company. Our confidence is grounded in the knowledge that we have a leading portfolio of brands, advantaged capabilities in innovation and design with the best still to come; a peer group leading e-commerce organization that's only getting stronger, a long list of opportunities for core distribution and broad-based international deployment and a world-class team working on realizing world-class levels of savings. This is a proven model and playbook and is being run by a seasoned team that has successfully executed it before. We could not be more committed and driven to deliver the transformative value creation story that's inherent in Newell Brands. Let me pass the line back to Wendy to help facilitate questions now. Wendy?

Thank you. And our first question comes from Wendy Nicholson with Citi Investment Research. Please go ahead.

Thanks; good morning. I think this quarter clearly is evidence, not that we needed it, that traditional retail is going away and online is what's going to drive your growth going forward. So could you give us kind of a higher-level view of where you are on e-commerce? I know you said 11% of sales that's growing double digits, but is double digits 20% or 50% growth? Where is that growth coming from? Is it the dotcom pure plays or is it retailer websites? And can you update us on the cost to compete? I've seen some of the merchandising you've done on Amazon, it looks great, but can you remind us or update us on how profitable that business is and how much more expensive is it to merchandise online versus in store? Thanks so much.

So, Wendy, thanks for the question. Our point of view about the retail landscape is there are going to be winners in brick-and-mortar. So, we don't think brick-and-mortar is going away by any way, shape or means. There will be some customers that perform really well in that format, but obviously every one of those brick-and-mortar customers will have a multichannel platform for fulfillment to include e-commerce. And you see the likes of Walmart and Target doing really well, Staples doing really well in the space in the commercial side. So, we expect a multichannel landscape in the future, with obviously, shoppers increasingly taking the easier path to fulfill the demand. So, our energy and our focus is not simply on e-commerce, it's on winning share in every channel where we compete and also on making sure that our resourcing, both our people and our money, are properly allocated to the marketplace. The risk in this environment is that you over-subsidize declining customers and don't have enough money focused on where the growth is. So, it's a very dynamic moment for the industry and for us as well and we're going to be in this constant state of asking that question, are our resources in the right place? Now obviously, both legacy companies made a big bet on e-commerce back in 2012 and the combination strengthens the potential. We made a choice to create a different organization structure to support the development of our e-commerce business at the beginning of 2017, by creating an enterprise wide e-commerce division, cross-functional team with full P&L responsibility for the delivery of our global growth and profit in this emerging channel. They've got responsibility for all three components of e-commerce: pure play, that's the Amazons of this world; retailer dotcom, that's Walmart.coms, Target.coms, Staples Advantage of this world; and then our own direct-to-consumer business. We've had strong double-digit growth and that doesn't mean 50%, but it doesn't mean 20%. It's somewhere in between. And there are certain customers within that landscape that are growing closer to 50%. And so we have really good momentum in that space, but it is still very, very early days. The vast majority of our progress is U.S. based at this time although part of the big investment we're making in 2017 is to strengthen our prospects outside of the U.S. in 2018 and beyond. There's a ton of opportunity in the U.S. still, as both our partners and we are learning how to merchandise through these platforms. While there is great momentum in retailer-driven events that are part of their merchandising history, I think most of these platforms tend to lose share during the consumer-driven moments that matter. And our challenge, together with our retail partners, is to figure how to capitalize on the platform in those consumer moments, that's the opportunity for us to bring insights and perspective to our retail partners in windows like Back-to-School and windows like the holidays. And so, we're making very, very good progress. We believe we're growing ahead of the market in this channel, otherwise, we wouldn't be delivering market share growth in the way that we are, although in many retail formats and retailers, in the dotcom space, difficult to measure. With respect to profitability, this is a mix positive for us today in both dotcom and in pure play. In D2C, it's not, although gross margins look better, you've got operating costs below the line that caused us to get some of that margin back. One of the really important priorities for the e-commerce division is to figure that bit of the algorithm out. How do you fulfill efficiently? How do you operate an eBay supply chain to do D2C profitably? That's going to take us some time to figure out. It's part of the financial model that we continue to work on and that team has responsibility for. So, I think we're very well-positioned, although in certain categories as we experienced in Q3 where e-commerce penetration is not yet as developed as in others, we see market deceleration as the growth mix benefit associated with e-commerce growth does not offset some of the contraction we experienced in some of the underperforming brick-and-mortar formats. Does that answer your question, Wendy?

Your next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hi, Dara. Dara W. Mohsenian - Morgan Stanley & Co. LLC: Hey. First, just more of a detail question. Any thoughts, Mike, around the level of incremental risk from retailer inventory reductions as we look out to 2018? Could you see more pronounced cuts? Or do you think at least at the back half of this year inventory cuts helped mitigate this issue? Obviously, a very volatile environment, but any conceptual thoughts would be helpful. And then you also mentioned a heightened focus on cost cutting and working capital going forward given the weak top line environment. Can you give more detail there? Is that more sort of doubling down on actions already in progress and the typical belt-tightening, or could there be more bigger new programs on that front? Thanks.

Right. Yeah, so on cost and on working capital, we don't envision more cash cost going out the door in order to deliver more savings. We're going to really tighten things up here with respect to discretionary spend and those types of choices don't require restructuring or restructuring-related costs. We have, in our funding algorithm, plenty of cash in the geo and in restructuring projects like Project Renewal to deal with those types of cost reduction efforts. But there are other opportunities available to us and while we've been pursuing them, we're going to go even harder on this until we get greater clarity into the revenue progression of the company. On your question regarding retail inventories, one of the biggest drawdowns we've had this year has been in our leading partner and our best estimate is we've taken about two weeks of inventory out of the system, a little bit over that, from the beginning of the year to this point in time and we lap the start of that experience in the fourth quarter. So some of the headwinds associated with that particular partner, I think, diminishes going forward even though they will continue to apply effort in that space. The bigger issue we have to come to grips with and accept is that there are certain retail channels that are struggling in the environment we're in where foot traffic is down and their business models are not well-positioned yet to deal with the shift to e-commerce. In those cases, we should expect, and will probably see, further inventory reduction. We have some specific events that we need to wrestle with as our negotiations get resolved in Baby, which I referenced and I think an example of the type of channel dynamic that I think will present a headwind in the Writing business is in the office superstore channel. But there are others beyond that that I think are going to become sort of a steady and ongoing headwind for us. The big one, which we experienced this year, is behind us as of the fourth quarter, but it doesn't mean this stream of resistance fully dissipates. Ralph, I don't know if you'd like to comment on working capital and the program we're going to put in place.

Sure. Dara, our focus is across the total cash conversion cycle. We've already made good progress on days payable outstanding, as you can see in the days we exited last year just below 60 days and we're on track, this quarter we're about 65, and we think there's room to go further. That's been largely from our procurement synergy effort. We put a big focus there and again we think we have some more programs to help drive that. Clearly a lot of opportunity on inventory as you can see from our inventory days being well above a year ago. Some things we're doing very much in the moment here are pulling back significantly on our internal production and with our suppliers, but importantly to sustain this and to keep continued improvement, we've got some focused improvement teams within some of the divisions where the most opportunity exists. And we're doing things on demand planning and tools related to that to help drive our inventories down to more efficient levels. And then kind of lastly maybe I'll just comment on accounts receivable. We see our DSO fairly stable, frankly with maybe some modest increases over time, but where there is increases we'll look to get value for that whether that's in the supply chain offsets or programming or other things. So net, clearly a lot of activity going on, on cash conversion. So just to build on that, in the moment as September started to unfold, obviously with a long value chain of sourced finished goods, it's very, very difficult to adjust your inventory days in a very narrow window of time when you've got that kind of value chain. However, as we've gone into the fourth quarter we've been, where we can, pulling as many days out of our self-manufacturing network as possible and at the same time really cutting back on our ordering patterns to rebalance our inventories. There is a margin impact and you see it and it's reflected in our guidance of pulling weeks out of production facilities in that you have an unabsorbed fixed cost structure in the factory footprint that flows to gross margin. So in our guidance for the balance of the year, we've accepted on cost that will pressure gross margin as a result of that choice. Some of that will carry forward into 2018, although we'll get into an equilibrium, I think, pretty quickly with respect to the manufacturing footprint. One of the questions we asked in the Writing business, and we've asked it, and the teams are working on it, is in the context of this shifting retail landscape, do we need to start to build inventories for Back-to-School 2018 as early in 2018 as we typically would? Those types of fundamental questions about how we've historically run businesses are being asked now. Or can we level load this business in a different way in the context of a more concentrated Writing business with the big mass customers in the e-commerce channels. And so, that's the type of question that's being asked. And strategically going forward, because we need to get our working capital metrics in line if we have an appetite to generate as much cash as we possibly can for M&A into the future, we have to attack the complexity in this business. And we're going to get serious about that over the next couple of years. We have over 400,000 SKUs in our portfolio. That complexity needs to come out. And we're going to tackle that issue head on, starting probably in the back half of 2018 into 2019 and 2020. And so we're going to build out a full-on program on working capital to get these metrics aligned with what we think is an appropriate level of working capital. We've been kicking this can down the road of the missing Q3 highlights, the consequences of having done that, and we're going to deal with it now because we want to use the cash. As I said on the call and in the script, nothing of what we've experienced in Q3 changes our point of view on the potential of this company. But we want to have all the resources we possibly can at our fingertips to be able to play for the industry consolidation that is available to us, and the market share consolidation that's available to us in these categories. So, this is a really important topic that you'll hear much more about from us going forward. It's not simply about adjusting our algorithm in the moment, but it's about finally getting on with tackling this working capital opportunity. Dara W. Mohsenian - Morgan Stanley & Co. LLC: Okay. And given some of that commentary, any thoughts on the prior goal of $1.5 billion in operating cash flow in 2018? Can you still get close to that or any thoughts in general around that number?

We chose specifically not to guide 2018 today, Dara, because we have the uncertainty of how the TRU discussion is going to play out and we want to see how Q4 presents itself. As I said, October is off to a solid start, but July was our best start to a quarter that we've had in a long, long time. So, we're very cautious about how this is all going to unfold. There are a lot of moving parts to include the working capital discussion, but you can be assured that we're focused on cash. We have two very near-end reasons to be. Number one, we've made commitments to deleverage the balance sheet which we are clear and firm and committed to do, and we obviously with the miss and our prior softness on top line, obviously, we're trading at a ridiculously low multiple for the potential of this company. I understand why, but we want to be in the market buying ourselves to the degree that we can and still deliver the leverage ratio outcome we've committed to deliver. This is the best M&A opportunity we've got. We know exactly what we're going to do in this company over the next number of years, and we're betting on ourselves, which obviously we think is a good bet. So, we're balancing those two things, and so there's plenty of incentive to get cash from operations to as high a level as we possibly can. And then the future, it gets a heck of a lot easier. Once we clear some of these thresholds, this business is very cash generative. If we make material progress on working capital as I think we will and we continue to deliver the synergies, we get very good margin development. Growth will be what growth will be, it will be market driven. We're going to grow ahead of our markets, continue to drive share, and so we are revisiting the algorithm and trying to find the right balance between margin, cash, and growth. But we're not going to presume that the environment gets better going forward, so we're going to live within that constraint. And that will shape the outcome on cash in 2018 and 2019, and then from 2019 onwards we're sort of in a very, very good place with lots of – certainly even in 2019 lots of optionality for application of cash beyond simply financing the business. So we have an eye on that future, and we understand there are stepping stones and there's a need to rebuild confidence in the team's ability to deliver the outcomes we commit to, but we're going to defer on making any comments about 2018 until we get further along into the fourth quarter and have a greater visibility into next year.

Your next question comes from Bonnie Herzog with Wells Fargo. Please go ahead.

Hi. It's actually Joe Lachky for Bonnie.

Hi, Joe.

Hi. So I understand your hesitation on giving any 2018 guidance. Obviously visibility is pretty low, but I was wondering if maybe you had any like high-level thoughts, specifically regarding core sales growth and really in the context of your comments of a more modest top line going forward. And in the past you've talked about the fact that you're in this strengthening phase and sort of approaching some sort of a scale or accelerate phase. And I wonder if you still believe that that progression for the top line will still take place? And whether or not the long-term 3% to 5% range that you've laid out in your previous presentations is realistic in the current environment? Thanks.

Right. So, Joe, obviously we're living in the here and now right in the moment, and I pick my words very carefully. We are clearly focused on growing ahead of the market. We're going to have some market dynamics because of TRU and because of the continued challenges in writing certainly into next year that will kind of serve as a compromise. I think I take heart in the underlying performance in the business. The 3.5% POS growth is a very strong growth number for the U.S. And that is the true measure of the underlying performance in the business. And that disconnect between sell-out and sell-in that I described, that 70 basis points down in core sales in the U.S. relative to that 3.5% POS growth, that's the scale of the issue we're facing into. I'm reluctant to guide core sales into 2018 until I get clarity on the TRU-Baby dynamic because I think there will be some dynamics connected to that with respect to both inventory liquidation and then whatever choices they're going to make from a network perspective, which we do not have their point of view on into 2018. So we're going to have to accept that as a reality that isn't in our existing performance. That said, our programming, our ideas strengthen as we move through 2018. And I was very clear, we're not going to back off on continuing to build our innovation funnel to strengthen these brands, to build the capability and design, and invest that capability back into our product performance. Those are the capabilities that will create the strategic leverage for the company going forward, that coupled with ecommerce. So we will continue to benefit from the investments that started in 2017. They start to yield growth and impact in the marketplace. They already have, but they will continue to progress, and there will be sequential improvement. But given the market dynamics, it's very, very difficult to – and I don't think it's prudent for us to declare what the number and the range looks like next year. Will we grow in 2018? I sure as heck believe we will, so I know there's some theories out there that suggest we can't and won't grow. That's nonsense. We will likely grow. There could be any given moment, a 30-day moment, a 60-day moment, a 90-day moment where our retailer dynamic could compromise that, and we just have to accept that. Like, we've been, in some ways, a little bit resistant. And this is in part me, because I've always overcome those types of headwinds in my experience. But this landscape change that's going on is as profound as I've experienced in my 35 years. So I think it's in everybody's interest for us to slow down, pause, watch, reflect, bottom out the TRU dynamic, and understand exactly how our negotiations in the Writing business are going to work out before we provide any guidance for next year. What you can count on is that we're going to build share, we will get sequential improvement through the quality of our ideas and innovation. And in the meantime, what we're going to do is we're going to work harder on costs, we're going to get better pricing reflection to offset commodity inflation, which has certainly eaten up a good portion of our gross margin-based synergies in 2017, and we're going to tackle the working capital issue. And in that combination, I guess you could argue that we're going to, in the very near term, prioritize margin and cash at a higher level than we have up until now, so that we compensate for the risk associated with the top line through this transitional period. And we believe that's the right choice to do. It doesn't in any way compromise our belief in the future, our belief in the brands, and our potential to grow ahead of the markets into the future. So if markets are growing at 3%, we should grow ahead of 3%. If markets are growing at 4%, we should grow ahead of 4%.If markets are flat, we're going to grow ahead of flat. And we need to adapt and adjust our earnings algorithm and cash flow principals- cash flow delivery to that reality. And we need to be prepared to flex and adapt to that environment as the landscape goes through the transitions that are in many ways connected to the shift that's going – a fundamental shift that's going on in shopping patterns, particularly in the U.S. So that may not be satisfactory in terms of an answer, and I know you're looking for something specific from me, but we'll give that when we're in a position to give that.

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

Thank you. Okay. Thanks. Good morning. So I appreciate it makes perfect sense you're not in a position to have a lot of visibility into next year, but I was curious on two fronts. One, on the visibility conversation. So retail inventory levels, when you had the big destock at Walmart last year's fourth quarter, particularly in appliances, I don't feel like there was a great sense that that was the beginning of something, right. It felt like it was specific to after Black Friday, some seasonal adjustment, but not that there was going to be a continued working down. So whether it's in that category, in that retailer, or just more broadly, is there anything you can do to sort of investigate, like where inventories stand at some of your bigger customers, so that you can think about how to manage that moving forward, not just adjusting the current working capital situation, but what might still be on the come as you move into next year? That was one.

It's an excellent question.

Okay.

We have perfect visibility into our largest retailers' inventory position. We know what our – through Retail Link, you have that visibility. You see exactly how many weeks on hand you've got at retail and how many weeks on hand you have in the warehouse. So we know exactly what has gone on there and we can see that by SKU, quite frankly, every day. So we have perfect visibility at that customers and they share that with us because it's in their interest for us to know and to work with them to manage those inventories down. It's not true with every retailer. We model our inventory position by retailer or by product family. Every month we're looking at this, so there's a standard report that we're looking at, which is how I can tell you what I told you earlier on the retail landscape. I think at the heart of your question, Lauren, is this hope that we will anticipate the future better than we have through the third quarter, both the retailer landscape and then the consequences of that through the whole business model, and that we are pivoting our resourcing and thinking about our future production requirements in the context of that next state of that retail landscape. The confession to make is we didn't do that well enough in the third quarter for sure. The reality of our business model is it's impossible to adjust in 30-day windows or 60-day windows or 45-day windows because of the fact that we're only 50% self-manufactured, and we have a long value chain of sourced finished goods that are on the water that's tied to kind of a forward-looking forecast. It's really important for us to accept the retail landscape dynamics for what they are such that we're not setting ambitions in the company that drive behaviors that carry too much risk. So, for example, if we put too big a number out there to chase for top line, the divisions will build inventories to support that outcome because we won't do that without them having given us some confidence in that. And if you miss, then you're hung out with those inventories. And so we have to make sure that we're doing a better job going forward of calibrating the upside in the business against the risk profile associated with working capital position. What makes that easier over time is getting the complexity out of the portfolio of each one of these categories and not trying to do that across too many SKUs because it becomes very, very difficult to model and get accurate at that level of fragmentation. And so there's plenty of work to do to get better at this, but I think I'm interpreting your comments in the right way, which is you've got to do a better job of forecasting the future and planning for that versus leveraging your historical view of how the business is going to perform and building your operating rhythm around the history. And that's clearly something we've concluded for ourselves and have taken to heart and that we're all thinking quite seriously about how to adapt our processes to embrace that. But to be honest, there's a fair amount of work to do to be really strong at that capability.

Your next question comes from Joe Altobello with Raymond James. Please go ahead. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Great. Thanks, guys. Good morning. The first question, quick housekeeping item. TRU was there an impact on core sales in this quarter and what would you expect the impact to be in the fourth quarter?

Yes, so there was no impact, no material impact, in this quarter. We went through a couple days where we needed to see how things were going to sort out in the end of September, but as it turns out, it may be $1 million or $2 million but no material impact in the quarter. That's how Baby had 10% core growth. We expect to have an impact in the fourth quarter that I think will largely be related to inventory liquidation in advance of whatever restructuring program Toys"R"Us does with respect to its fleet of stores. So that's built into our guidance and assumptions around that on Baby. Baby has been growing unbelievably well, but I think in the fourth quarter you guys should consider the fact that it could be flat to down in the face of that kind of headwind, and that's built into our guidance. If that happens in the fourth quarter, that will be consistent with our view. If it doesn't for timing reasons, then it will shift into Q4, and that's one of those uncertainties that's still to be resolved. The more important conversation around TRU/BRU is what does the future look like? And this our leading Baby retail partner, baby care retail partner globally. We have a very good relationship with BRU/TRU. We've built our businesses in a collaborative way over time, and we expect to come through those discussions with the same strategic partnership in place, albeit with a shift in the profile of their business connected to whatever they choose to do with respect to their store configuration. But in terms of the development of the brand, the commitment to do it, our partnership, the constructive nature of the conversations, those are all positive and ongoing, and we'll get closure on that I suppose over the – probably the next couple of weeks and then we'll have the clarity we need to look forward.

Your next question comes from Andrea Teixeira with JPMorgan. Please go ahead.

Hi, good morning. It's Christina Brathwaite on for Andrea.

Hi, Andrea.

We just wanted to dive into the inventory in a little more detail. So up 18% (54:27) year-over-year. Can you talk about a little bit more about the composition? It sounds like a lot of that was driven by the Writing business, but are there any other kind of pockets that you'd call out there? And then looking ahead, how are you thinking about getting to more normalized inventory levels? How much longer do you think it will take? And are you embedding any kind of gross margin headwind in your guidance related to just selling that down?

Yes. So two things. Our issues in the quarter were all U.S. based. It was writing instruments and it was – our miss was writing instruments related and appliance related for different reasons. Obviously, as I've said, market growth was below our forecast in the quarter. However, share progression in writing instruments was right about where we expected it to be. But the net effect was a lower sellout than we had built into the model. And because market growth was effectively flat across the landscape with some retailers down and other retailers up slightly, I think everybody anticipated a stronger back-to-school and therefore the whole marketplace had to adjust to the shorter market growth, and so that's unfolding. On appliances, the issue is a more familiar one to us, and it's one that we're experienced addressing, but it does have retailer inventory consequences, and that is that with the exception of the cookers' market, which is where this pressure cooker phenomenon is, market growth was down sequentially in the quarter. Pressure cooker is really, really strong. That's why we're launching Express Crock pressure cooker that does multi-cooking and we are broadening the footprint into that space. But more broadly speaking, market growth in appliances came down excluding the cooker segment and our share importantly was down across many of our formats. And what's missing there is the kind of innovation we need to be able to be competitive in that space and we need to do things that allow us over time, to premiumize that category – our footprint in the category. And so we're working on that. That's where we started at the beginning of the year, and it starts to play out in the fourth quarter and into next year. Retailers in that environment also hold back on inventories because market growth, ex the cooker segment, was flat to down. And so we've had some inventory dynamics there. We have on our own inventories pulled manufacturing days out of the fourth quarter. So in our guidance we reflect in the gross margin forecast, which we look at, that informs the EPS outlook, we've assumed fixed cost absorption to gross margin that is beyond what you would normally expect as we pull weeks of production out of our own manufacturing network, and that's certainly a headwind. I think that carries forward into part of 2018 because we're going to continue to want to ratchet down our working capital and production times across many of our self-manufactured businesses. And so I do think there is margin pressure, particularly in the beginning of the year that we'll experience at gross margin that'll be reflected in our point of view forward when we get to the point of providing that. That said, in 2018 we'll do a better job on pricing because we will have – we've announced pricing on all of our resin-based products, and we're in the midst of negotiating price acceptance customer by customer. That starts to flow into the P&L by the end of the fourth quarter and into 2018.So we'll have more positive price to offset the inflation. So we get some other benefits that start coming our way that will help gross margin next year. And we get the continued impact of synergies to gross margin as well. But that's still to all play out. We'll walk you through that when we provide 2018 guidance, but there are things that can help us and we'll work to offset some of those pressures.

Your next question comes from Kevin Grundy with Jefferies. Please go ahead.

Hey, Kevin.

Thank you. Good morning, guys. My question for you broadly on the portfolio and then I wanted to come back to the POS data that you cited in the release. So first one, and we talked about some – I was hoping you could dimension the magnitude of the deterioration in the outlook that we've seen, particularly since September. And maybe even going further back, Mike, some of the biggest surprises to the downside, and I guess the context here, the financial delivery when you were running Newell Rubbermaid was fantastic, and at the risk of being cheeky, maybe Staples-like and that really drove the multiple for the stock over time. But clearly the delivery has been less consistent here post the close of the Jarden deal, which I guess plausibly one would think this relates to the integration or maybe something that was missed with that portfolio. So any comments there, Mike, now with the benefit of hindsight looking back over the past year-and-a-half or so since the deal closed in terms of magnitude driving some of the downside here versus initial expectations? And we talked about some of the U.S. retail dynamics and of course that hasn't helped and we've seen the Nielsen data which hasn't been great for a while, so maybe it's specifically in U.S. brick-and-mortar. But to the extent you can dimensionalize some of this, Mike, would be helpful. And then I also wanted to come back to the POS sales data, so the 3.5%. What exactly does that capture? Because the Nielsen data that we have even making adjustments is closer to flat and I would even say 3.5% kind of growth is obviously not what's discounted in your share price at this point, and also, sort of tying that in, Mike, with your comment that will likely grow next year. So just sort of help us understand that. On the one hand, the category is doing 3.5% in the U.S., which is sort of what's syndicated in the data, then with the comment understanding some of the destocking and some of the Toys"R"Us drag that you sort of couched that you "likely grow" when the category is doing 3.5%, at least that's what's syndicated. So sorry for being verbose, but thank you for all that.

No problem. Let me start with the last part of your question first. So the way we track, we track four things every week that the data becomes available. Some of it becomes available daily, some of it becomes available in four-week increments. And we don't track Nielsen data in the traditional sense. We're looking at Nielsen panel diary data, which includes the e-commerce effect across all of our businesses, and in some cases that's not available, so we take what is available which is an IRI platform, and then there are some specific databases in Team Sports that are neither IRI or panel diary and then we aggregate that into a scorecard that all of us get that looks at the market growth data sellout in 4-week, 12-week, 52-week increments on market share, share change. And then we get POS data weekly, which is transaction data from our retailers, including Amazon and we get the ability to split both E from bricks-and-mortar by product family. We could go lower, but we've got all that data that comes in and gets aggregated. So you're not going to see the POS data that we see. We see that every week and it's the equivalent of retail link from all of our retailers and then of course, we have our invoicing that we compare all that to. We look at it across 75 product families and we do this in the U.S. And so we have a very, very granular view of our business and it's a unique combination of these different data sources that gives us the perspective and that's the number we quote. Now what I said, Kevin, was our sellout was 3.5%, not the category sellout. Category sellout decelerated in the quarter and was effectively flat. There are examples in certain product families where markets were down and there are examples where markets were up. So they're not all flat, but in aggregate they're flat and that represents a deceleration from the first half of the year to the third quarter in terms of market growth. And that's not what we assumed when we built our plan and our guidance. So we do think it's right to be more prudent going forward given this experience with respect to market growth recovery. And our theory is what I espoused on the call, which is because we see patterns in the business where we've got – and the category has higher e-commerce development, we see better and more insulated market growth dynamics. Where the category has less e-commerce development, we see less insulated market growth dynamics as retail landscapes shift and adapt to foot traffic challenges, generally, that they've got as a result of changing shopping behavior. And so we're living in a world that, when we can't control that aspect of how retailers will behave, as they look to preserve their value creation algorithms, and so we have to just accept that and live with that. So our point of view going forward is we need to be a little bit more tepid in our outlook on market growth. We will continue to forecast market share growth as demonstrated in the third quarter. We had pretty broad-based, I told you the list of categories where we had share growth. That's measured, that's not us making up any data, that's data from the suppliers that I was mentioning to you. And so that's important news. In the syndicated data that I worry you guys look at, you're missing all that e-commerce contribution. And knowing what I know about those syndicated providers, they probably don't have the breadth of coverage that we arranged with – from a channel perspective, that we've arranged through our supply relationships. So the coverage landscape in our categories in those more traditional syndicated providers is going to be much more narrow than what we have visibility to and it's much less reflective of what's going on in our business. So yes, that would be the fundamental answer to your question. Was there a bit that I missed, Kevin?

And I apologize, Kevin has dropped from the Q&A.

Okay, great.

Okay. Your next question comes from Jason Gere with KeyBanc. Please go ahead.

All right, thanks.

Hey, Jason.

Hey, Mike. I guess I know you're talking about taking some of the pricing on the resin-based and seeing how that's kind of playing through. As you look at the quarter and some of the changing dynamics, and I know you've done this with a few categories, but how do you think about pricing adjustments to the downside? And some of the categories that you play in that maybe these are categories where the price might need to be a little bit lower just to be more competitive for the consumer out there, especially as we live in this Amazon world where everything seems to have a private label element to it. So I was just wondering how you think about the pricing on the downside to kind of counteract some of the pricing that you need to take for the commodity-based impacts? Thanks.

Yeah, well, we've experienced negative price this year, that's part of the challenge in a more inflationary environment. We put more programming in, as I described to you guys in a recent conference. So we're looking forward to try and land these price increases in the context of more inflation. It's easier to sell pricing when you've got that dynamic going on and everybody, including private label, has to deal with the resin inflation. I noticed last couple of days some other folks talking about this as well. And so we'll do our best to land those pricing actions, and so far, so good. But your point about relative price is a really important point and the primary objective we have as a company is to build market share. And to build market share you've got to have great innovation, you've got to have great communication, you have to have great packaging, you have to have great product performance. But you have to live within a set of price principles relative to the value offering in your categories and relative to the premium offerings in your categories. And while we always are pushing to premiumize these categories through innovation, we will occasionally price down to make sure we maintain those price gaps. Now, in an inflationary environment, which we have been in, in the back half of 2017, there's less pressure on that. The good news for us is that private label's not a big variable. Unlike consumer staples and food, where private label is a real issue, in general private label is relatively underdeveloped in these categories, and I don't think it becomes more developed unless we don't do our jobs as brand leaders. And if we do our job with innovation, if we do our job with brand positioning, if we do our job with product design and product performance, then there's really no reason for private label to exist. And I've read all the stories and I've listened to all the narratives about how that's going to change in an e-commerce world. I just don't subscribe to that theory. I think if we do our work well, we won't have private label issues and we won't have that downward pressure that you're describing. All that said, where we haven't done our work well, we do have that pressure and I've described the experience that both Jarden and Newell have had with Coleman at one of our leading retailers at Walmart, where because of the prior owner to Jarden's acquisition of that brand not doing their job, Ozark Trail emerged as a private label offering at Walmart and once it's there, you're in that vortex that you describe. So that's an important reference point for us as a company to not lose sight of because that is the consequence when you don't do your job right. So it's great. It creates all kinds of challenges for that particular team to work around that dynamic, but it also serves as an important bellwether for us on what happens if you don't do your work well. Then you live in the world you described, Jason, and we don't want to live in that world. That said, if we need to price down to maintain our price principles, we are unhesitant to do that because that's part of building the brand.

Our last question comes from Bill Chappell with SunTrust. Please go ahead.

Hey, Bill.

Hi. Actually, this is Stephanie on for Bill. I just have a question on Yankee Candle, just kind of as you transition into that large retailer you announced last quarter. Maybe you could talk a little bit about that and maybe anything negative you got from some of your other retail partners. Just some color on that would be helpful. Thanks.

Look, first of all, I'm really proud of the Yankee Candle team. Hope Margala, who runs that business, is doing an outstanding job, as are the whole group up in Deerfield. And they're dealing with a very difficult challenge in their retail platform, and they've done it unbelievably well this year and we're coming to this point where we're starting to get the fruits of our labor benefiting them in the marketplace. So we've put a lot of work in the second quarter cleaning up the brand architecture, not just in the U.S. but also in Europe. And so that work is largely behind us now. We've established a true brand architecture within Yankee with Yankee Candle as the premium offering and Home Inspirations from Yankee as the value offering. It's not an opening price point position, but it's a value offering relative to Yankee. We want to put a Yankee Candle within arm's reach of every consumer in the United States. And so the primary focus on Yankee is putting Yankee Candle out there so that our consumers have the opportunity to experience this brand, and we're pushing to do that very broadly across mass channels, across specialty channels, through e-commerce, both within our own D2C site and through pure-play options as well. Our largest retailer, Walmart, took Yankee Candle in over the summer and it's doing really well. And so I think it's early days because we're coming into the peak consumption window, so that'll be the true test of how it's doing, but that move is the first step in a series of steps that we've taken. Obviously we've also bought two brands this year. We bought WoodWick; it's a multi-sensory platform of sound and fragrance, and then we've just bought Chesapeake, which is a completely different positioning from Yankee in more of a spa, sort of, sensory positioning. And those three brands together, along with Millefiori in Europe will create a brand portfolio that allows us to tackle what is a very big opportunity in Home Fragrance around the world. And so we're really excited about it. We believe that we can continue to renovate retail such that we outperformed in that segment. We're trying new things including this concept store and pop-up store in Soho that opens next week, this micro site that presents the new brand architecture and portfolio in a holistic way that is not specifically Yankee focused, but a total portfolio focused platform. And we're doing personalization in a way that's bigger and better in the fourth quarter than we've done previously. So I think there's lots of opportunity here ahead, and we'll work through all the challenges of operationalizing that as we move forward. But I think the team's done an excellent job of working through the reset this year and has the brand positioned to perform as we go into next. And we'll see how that all plays out.

This concludes our question-and-answer session. I will now turn the call back to Mr. Polk.

Wendy, can you just indulge me for one last-second.

Yes.

I know the folks that usually stick on these calls all the way to the end are my people, and so just a final thank you to my Newell colleagues, particularly for your perseverance in part through this call, but also through the third quarter and your drive and determination to continue to realize the ambition we've set out for the company. Let's all stay focused in the here and now while being uncompromising in our drive to reach our long-term potential. It's all still out there for us to play for and we need to kind of put ourselves in the position to do just that. So again, thank you and thank you, Wendy, for your help with the conference.

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

Wendy. I just made my closing remarks, so I think we're all set.