Newell Brands Inc. (NWL) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning, and welcome to Newell Brands' Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open 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 conference call over to Ms. Nancy O'Donnell, Senior Vice President of Investor Relations. Ms. O'Donnell, you may begin ma'am.

Thank you. Hello everybody. Thanks for joining us. With me on the call today are Michael Polk, Newell Brands' President and Chief Executive Officer; and Ralph Nicoletti, our Chief Financial Officer. During our call, we will be making statements that are forward-looking in nature. These statements are only predictions. Actual results may differ materially due to risks and uncertainties and I'd point you to our press release and SEC filings, which discuss these risks. We undertake no obligation to disseminate any updates to these statements. I'd also like to remind you that during the call, we will discuss certain non-GAAP financial measures. These non-GAAP measures should not be considered a replacement for and should be read together with GAAP results. Please refer to the Investor Relations section of our website and our earnings release for GAAP to non-GAAP reconciliations. Thank you. And now, I'll turn it over to Mike.

Thanks, Nancy. Good morning, everyone, and thanks for joining the call. Today, I'll address our third quarter results, as well as the progress we're making on our Accelerated Transformation Plan. Ralph will then provide a detailed review of our financial performance and I will address our fourth quarter outlook before opening it up for your questions. Over the last few quarters, we've had to confront several significant external factors, including the Toys"R"Us bankruptcy, changes in the Writing retailer landscape, U.S. trade conflict and emergence of tariffs as well as FX headwinds. Our team has been working hard to address these challenges head-on. And in the third quarter, we've made good progress. As a reminder, we're focused on five core areas. First, returning the business to a consistent pattern of delivery. This means setting appropriate milestones and delivering against them, making our numbers quarter-by-quarter. Second, we're working hard to optimize our cost structure by delivering on our ongoing savings programs and extracting to retain costs related to the divestitures, we will and have made as we transform our portfolio. Third, we're focused on increasing cash flow by driving profitable growth, making meaningful progress in working capital and reducing the complexity across our business. Fourth, we are reshaping and focusing the portfolio on our most attractive consumer businesses, executing the divestitures and using the proceeds to delever and repurchase shares. And fifth, we are repositioning the organization for more consistent and sustained operating performance, restructuring division and function designs, while simultaneously strengthening and upgrading talent. In the third quarter, we made progress in all five of these areas. Specifically, we delivered sequential improvement in core sales growth in all segments in all regions with Writing returning to growth and e-commerce, excluding the absence of Toys"R"Us, U.S. Baby Registry growing double digits. We delivered 13% normalized operating margins, exceeding our expectations and year ago performance. Despite increased inflation, the July round of tariffs and the negative impact of foreign exchange. Pricing and productivity were positive contributors in the quarter and we made substantial progress on overheads through efforts to right-size the organization. We delivered over $570 million of operating cash flow, an increase of $389 million versus prior year as a result of good progress on inventories and on payables as efforts to renegotiate payment terms on sourced finished goods have begun to take effect. And we completed the divestiture of Rawlings and Waddington late in the second quarter and Goody this quarter, generating $2.6 billion in after-tax proceeds. In that context, we paid down nearly $900 million in debt, exiting the quarter with net debt down $2.5 billion versus prior year. We completed a tender offer for another $1 billion debt in October and we passed back over $600 million to shareholders in the form of dividends and share repurchases. Our share count in the third quarter was about 4% lower than year ago. As for the remaining non-core businesses, we're well along on the sales process for several with others beginning to take shape. We're on track to deliver about $10 billion in after-tax proceeds through these divestitures and we'll use the proceeds coupled with our operating cash flow after investment in the business to continue to de-lever and also buy back shares at very attractive prices. On our fifth priority, over the last two quarters, we've taken steps to right-size our organization, actioning change in several functions including IT, marketing, R&D, design, and e-commerce. We've made the difficult, but necessary decision to restructure and those actions have contributed to our professional head count on the continuing businesses being down by about 10% compared to where we stood at the beginning of the year. We are laser-focused on strengthening the operational performance and financial flexibility of the company. While we know we have much more work to do, third quarter was one of sequential progress. We will continue to execute with a sense of urgency in repositioning Newell Brands for sustainable growth. And in the quarters to come, we will turn the page on this challenging chapter in our history. Let me pass the call to Ralph to walk through a more in-depth review of our financial results and then I'll return to provide perspective on the balance of the year. Ralph?

Thanks, Mike, and good morning everyone. As I go through the financial results, please note that the discussion of the income statement metrics reflects our continuing operations. I'll remind you that under GAAP, all overhead costs and interest expense not directly related to discontinued operations are allocated to continuing operations, which burdens margins and profitability in both 2018 and restated 2017 results. The company is implementing action plans to fully offset retained costs over time. Reported net sales from continuing operations of $2.3 billion declined 7.7% versus last year due to lower core sales, a roughly 140-basis-point headwind from foreign exchange, as well as the impact from the adoption of the 2018 revenue recognition standard. Core sales from continuing operations contracted 4% year-over-year in Q3, which represents good sequential improvement from Q2 is minus 10%, but we're slightly below our expectations. The areas that came in short of our expectations were in the Appliances business and Home Fragrance in EMEA, while Writing came in better than planned. Reported gross margin increased 80 basis points versus last year to 35.9% as the benefit from productivity, pricing and the positive impact of the new revenue recognition standard more than offset inflationary pressures and other manufacturing costs related to inventory reduction. Normalized gross margin declined 10 basis points year-over-year to 35.7%. Reported SG&A expense of $576 million represented 25.3% of sales versus 27.9% in the year-ago period with restructuring and integration costs moving down significantly year-over-year. Normalized SG&A expense of $517 million or 22.7% of sales was slightly favorable to the 22.9% in the year-ago period. In the third quarter, the company recorded an $8.1 billion non-cash impairment charge from continuing operations, largely attributable to the significant decline in the company's market cap during the third quarter. The impairment test, which we formally conduct annually in the third quarter is based on a sum of the parts valuation but is capped at the fair value of the company defined as the enterprise value at a reasonable control premium. Given the significant pressure on Newell Brands' shares in the recent months, the majority of the impairment was driven by the reduction in the market cap with the remainder attributable to a change in cash flow projections from what was assumed in the impairment test that we performed last year. Largely due to this non-cash charge, the company reported an operating loss of $7.9 billion. Normalized operating income was $296 million compared with $319 million in the prior year. Normalized operating margin came in at 13%, up 10 basis points versus last year. We remain on track to deliver normalized operating margins in the 12% to 12.4% range for the back half of this year with a sequential step down in Q4 margins as we plan to increase A&P spending to drive consumption. Net interest expense was $106 million down from $116 million in the year-ago period as we have reduced our net debt balance by $2.5 billion year-over-year. Based on the deleveraging actions we have taken thus far including the recent tender, we now expect full year 2018 interest expense of approximately $445 million. This quarter's tax benefit of $1.2 billion exceeded the year ago benefit of $131 million, primarily due to the tax benefits associated with the impairment charge and the integration of certain legal entities. The normalized tax benefit of $69 million compares to last year's benefit of $61 million. We now expect the full year normalized tax rate for continuing operations to be a benefit in the mid-30s range. Reported net loss from discontinued operations of $317 million included $517 million in impairment charges related to assets held-for-sale and compared to net income of $123 million last year. Normalized net income from discontinued operations was $129 million as compared to $156 million in the year-ago period with the year-over-year comparison reflecting the loss of income from the businesses that have been divested in 2018, which include Waddington, Team Sports and Goody. We ended the quarter with 471 million diluted weighted average shares outstanding as we repurchased approximately 19 million shares during the quarter. For 2018, we expect a weighted average diluted share count of approximately 480 million shares and a fourth quarter weighted average share count of approximately $470 million (sic) [470 million]. Reported diluted loss per share for the company was $15.10 as compared to reported diluted earnings per share of $0.48 in the year-ago quarter. Reported diluted loss per share from continuing and discontinued operations was $14.43 and $0.67 respectively. Normalized diluted earnings per share were $0.81 as compared to $0.86 in the prior year. Normalized diluted earnings per share from continuing operations were $0.54, same as last year as the decline in sales was offset by overhead reductions, interest savings and taxes. Normalized diluted earnings per share from discontinued operations were $0.27 compared with $0.32 in the previous year. Now, turning to our segment results, net sales for Food & Appliances were $722 million, a decline of 11.4% versus the prior year. Core sales were down 5.9%, reflecting weakness in Appliances due to continued competitive challenges in the U.S. The Home & Outdoor Living segment delivered net sales of $727 million, down 6.8% year-over-year, with core sales down 5.9%, largely driven by distribution losses on Coleman in the U.S. and weaknesses in Home Fragrance in EMEA and Yankee retail stores. Our Connected Home & Security business grew double digits. The Learning & Development segment posted net sales of $829 million, which represents a 3.9% decline year-over-year. Core sales were down 0.5 point. Our Writing business grew year-over-year and a significant sequential improvement. Baby also improved sequentially, but was down year-over-year reflecting the hangover impact from consumer purchases that were accelerated into Q2 to take advantage of the liquidation sales at Babies"R"Us. Operating cash flow for the quarter came in at $572 million versus $183 million last year with the year-over-year improvement reflecting favorable working capital movements as well as reduction in restructuring and integration costs and cash taxes. We're on track with our deleveraging plans and repaid almost $900 million of debt during the quarter, comprising the term loan, commercial paper and the October maturity. In October, we launched a tender offer for $1 billion of additional debt, which is substantially complete as of today. During the third quarter, we returned approximately $620 million to shareholders through share repurchases and dividends. We continue to make progress on the divestiture front as we closed on the sale of Goody in the quarter. The other divestiture processes are advancing and will provide us with additional capital deployment opportunities in the coming months. I'll now turn the call back to Mike.

Thanks, Ralph. Looking to the balance of 2018, we expect consumer macros to remain generally healthy and our retail landscape to continue to stabilize. On Baby, we've now come through the two most difficult quarters relating to the Toys"R"Us bankruptcy. Year-to-date, our sales to TRU are roughly $120 million lower than year ago with about $55 million of that amount impacting the third quarter. While we have two more quarters to go until our Baby business fully laps TRU's bankruptcy, we've made good progress shifting share to other retailers, particularly in the large baby gear categories of toddler car seats and strollers. Baby has been one of our strongest performing businesses over the last five years and we expect once we lap the transitory issue associated with TRU, the Baby business will return to its brand and innovation-led value-creation track record. On Writing, our choice to accelerate the retailer trade inventory reset into the first half of 2018 has put a significant portion of the associated headwinds behind us. This is particularly true in the traditional distributor trade. We experienced a solid back-to-school, despite spending less than we did a year ago, with Writing returning to growth in the quarter. We expect that trend to continue. While retailer-driven changes will likely continue to emerge, we do not envision any near-term challenges of the magnitude we've had to deal with. Recent news regarding Sears and Kmart does not pose an issue for Newell Brands. For the balance of the year, we expect core sales growth in our continuing businesses to improve sequentially in all segments. The improvement in core sales growth should be driven by the highest level of advertising and promotion spending this year in support of e-commerce activation, holiday merchandising and new innovations, like our premium line of Calphalon Appliances featuring all of the durable construction and craftsmanship that Calphalon cookware is known for along with a sleek modern finish and premium functionality; and, our Oster Hand Mixer with HeatSoft technology that gently softens cold butter to room temperature 12 times faster, resulting in lighter and creamier batters; and, Graco's new Sense2Soothe Swing with Cry Detection technology that has eight different motions that mimic how mom and dad naturally move and an audio system that detects cries automatically adjusting the swing settings to the combination that best soothes baby; and, Yankee Candle Elevations with a Platform Lid, which boasts a newly designed tapered glass silhouette and dual-purpose lid that acts as a platform for the candle while it burns; and, new Onelink Safe & Sound from First Alert, a transformative innovation that combines intelligent protection from smoke and carbon monoxide with superior audio capability that serves as your home speaker system and intercom, compatibility with your main connected home platforms and built-in virtual assistants. This new innovation turns your smoke detector into a two-way communication device that keeps you connected through the entire home. These are just a few of the new innovations that are flowing to market as a result of the brand development and design work completed over the last 18 months to 24 months. With the expected sequential improvement of core sales in the fourth quarter, we've reaffirmed our full year net sales guidance between $8.7 billion and $9 billion. With respect to margins, we're making steady progress dealing with increased inflation, tariffs and FX through our ongoing cost and productivity programs and our tariff mitigation efforts. There have been two rounds of tariffs implemented in the third quarter with another step up in certain categories expected in January 2019. Through the summer, we've enacted several mitigation efforts such as repatriating production into our U.S. manufacturing locations where it makes sense, renegotiating our sourcing contracts when possible, off-shoring production outside of China where possible and negotiating with the USTR office for tariff exceptions. Where we cannot mitigate the tariff, we are working with our retail partners to offset the tariffs through pricing. These customer conversations have been pretty constructive, as our own retail partners deal with the same challenges on their own brands that we have with tariffs. Importantly, we've been successful at negotiating an exception for most of the U.S. tariffs planned on baby gear, which represented a substantial portion of the original $100 million annualized tariff exposure communicated with Q2 earnings. However, the U.S. government has subsequently announced its intention to increase the recently implemented 10% tariffs to 25% at the start of 2019. If those tariffs do take effect in early January, our annualized tariff cost exposure would return to the original $100 million communicated in August. We have already announced pricing tied to the early January new tariff levels. In this context and given the solid margin delivery in the third quarter, we've left our continuing operations normalized operating margin outlook unchanged at 12% to 12.4% for the second half of 2018. We're reaffirming our full year total operating cash flow outlook of $900 million to $1.2 billion and we have increased our outlook for total company normalized earnings per share by $0.10 to a range of $2.55 to $2.75, reflecting our third quarter performance and new tax planning benefits. There are three growth opportunities we will continue to work on: reigniting growth in our U.S. Appliances business through stronger innovation and e-commerce penetration; broadening our distribution footprint on the U.S. Coleman business as we come into camping and outdoor season this coming spring; and driving profitable growth on Home Fragrance in Europe through more constructive merchandising programs and the deployment of WoodWick to Europe. Work is underway on all three of these opportunities and we expect to make progress over the next few quarter in each of these areas. Before we close, I want to spend a moment on the impairment charge we took this quarter. As Ralph explained, the majority of the charge is dictated by the third and fourth quarter pull-back in the stock price. Clearly, our performance on certain businesses from both legacy companies contributed as well. While the volatility in our environment over the last year has been unprecedented, we acknowledged the need to change our approach to reflect the new set of circumstances through the Accelerated Transformation Plan launched in January. The ATP is a plan that maximizes value and sets the stage for the future. We are convinced that this new path is the right one and are on our way to delivering the expected outcomes. Our momentum is beginning to build. We see green shoots in many places and success stories are beginning to emerge. The team has shown incredible determination, perseverance and the drive for results through this period. We are all working to reignite our core performance and create value for shareholders. Again, we're focused on five key areas: strengthening our operational performance, optimizing our cost structure, increasing the cash efficiency of the company, executing the divestitures and reallocating capital to delever and repurchase shares, and rightsizing and strengthening the organization. We're making good progress in each of these areas. Thank you for your continued interest in Newell Brands as we go through this transformation period. With that, let's take your questions. Operator, over to you.

Thank you. And our first question will come from Rupesh Parikh with Oppenheimer. Rupesh Parikh - Oppenheimer & Co., Inc.: Good morning and thanks for...

Hi, Rupesh. Rupesh Parikh - Oppenheimer & Co., Inc.: Good morning. Thanks for taking my questions. So maybe to start off, so you mentioned that you expect an improvement in core sales growth in Q4. Do you still expect...

Yeah. Rupesh Parikh - Oppenheimer & Co., Inc.: ...to be back in positive territory?

We'll see how that plays out. I think it's possible that we end up in positive territory, depends on the recovery in Writing and how significant that is, the movement on Baby. We should see improved performance on Appliances with the launch of the innovations that I was speaking to. It's possible and I think that would be a great outcome if it occurred. I think the thing we're trying to do is to stay focused on sequential improvement and taking this one quarter at a time. There's lots of uncertainty at the end of the quarter related to how things will unfold with respect to tariff pre-buys and that could be a variable that drives performance up or down. So this will be a month-by-month thing and I think we're certainly in better position than we've been at any point in the year. Our spending levels are up in the fourth quarter, our innovation is stronger in the fourth quarter, the retail landscape is stabilizing with a large part of the Writing headwinds behind us. And we are making progress on the share shift we intend to deliver related to TRU. So, I'm more optimistic than I've been at any point through the year and I think the team is doing a good job of executing and things will play out in the fourth quarter as they do. Our primary focus is on making sure we create the most value out of the ideas we're bringing to market and continue to make progress on the cost and cash agenda we have as a company, while executing the divestiture program completely and fully reallocating capital to delevering and repurchase. So lots to do, that agenda is broad. Third quarter is a good indicator that we're headed in the right direction. And I think the way to think about the fourth quarter is another quarter of sequential progress as we turn the page on 2018 and move into 2019. Rupesh Parikh - Oppenheimer & Co., Inc.: Great. And I'm going to slip in a second quick question. So with the divestitures, it sounds like you guys are still comfortable on achieving that $10 billion in after-tax proceeds. So just curious what's driving that comfort level and from your, I guess, perspectives earlier this year, are there any changes in the timeline of achieving that $10 billion target?

No, our timeline is the same and our comfort level is the same. We have a number of processes under way and they are coming down the homestretch. And there is nothing that we can envision that will get in the way of our delivery. Rupesh Parikh - Oppenheimer & Co., Inc.: Okay, great, best of luck for the balance of the year.

Thank you, Rupesh.

Thank you. Our next question comes from Joe Altobello with Raymond James. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Thanks. Hey guys, good morning.

Hey Joe.

Good morning. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Just wanted to go back to something you said Mike, I think in May looking ahead to 2020 and I know a lot has changed since then, but I think you kind of laid out the big picture, $9.5 billion company on the top line and normalized operating margins of about 15%. First, is that still a reasonable target given what you know today. And then second, if it is maybe if you could help us bridge the 10% operating margin you're looking at for this year to get to 15% by 2020. I know a lot of that's stranded overhead and (28:59) you that. But if you could sort of tell us what this company looks like in two years and sort of how you get to that margin number? Thanks.

Sure. Well, look, I think you're right to kind of point out the need to deliver against the cost agenda. We have to get the retained costs that are associated with the divestitures out of the system. We made good progress this year, that's a critical variable. Delivering the core growth acceleration is another critical variable. I feel good about the progress we're making there and the work that we've done over the last two years on innovation is beginning to come to market as evidenced by the list of ideas and product launches that I shared with you. That has to all bear fruit. Obviously, the environment has changed and will continue to change and so we need to overcome those changes to include the emergence of tariffs, to include a higher inflationary rate, to include FX. I mean these are the things that with the exception perhaps of tariffs, these are the things that businesses need to overcome and there will be ebbs and flows in those challenges, I'm sure, over the next 18 months. So, we've got work to do as everybody does in terms of confronting the sort of the new realities of those variables. But I wouldn't draw any conclusion about the future, about 2020 at this point. We'll work through the puts and the takes and we will continue to look at this every quarter. I think the margin progression in Q3 is an important indicator of our ability to make progress and make progress fast. So, we've got to work the plan, we've got to deliver to offset the headwinds through pricing productivity and the cost initiatives. And we've got to be nimble and smart and adaptive to what will undoubtedly be sort of a changing landscape through the next 18 months or so. But at this point, I wouldn't want to get into the specifics of the bridge because I think there will be a lot of moving parts. But our ambition is firm and our point of view is consistent with what we've expressed in the past. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. That's helpful and I totally understand. If I could ask a second question on Writing, it sounds like you do expect the growth you saw this quarter to continue. Is there a risk that we see another leg down in terms of inventories in the office superstore channel. I think if you look at Staples and their merger with Essendant, they're talking about years of inventory reductions. Thanks.

Yeah, we've come through a really intense period of inventory reduction in the traditional Writing channels, particularly in the distributor trade or the wholesale portion of that Writing landscape. And we are building our point of view on growth going forward in the context of our delivering to the new inventory targets that our retail partners have established for themselves. And so that work is underway and ongoing. Don't envision major steps down. We've just come through that period where we accelerated the major step down into the first half of the year. However, we will continue to have headwinds in inventory that will come out of the channel, but that's built into our guidance and we're being very plan full (32:47) about it. The Staples and Essendant combination is one where we will keep our eyes on, however, as I said, in the first half of the year and quite frankly back into 2017, inventories have come down substantially in the traditional distributor trade and I would characterize Essendant as one of those distributors. So we made a lot of progress in an 18-month window with them getting to their articulated targets, and of course, we will be vigilant on making sure that our sell-in and our sell out matches through them so that we don't have any further issues to confront in the future. But I'm very pleased with the progress. Team's done a good job. It was a very painful nine months to go through and while we have some more work to do, the vast majority of the work is behind us. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Got it. Okay. Thank you, guys.

Thank you. Our next question comes from Andrea Teixeira with JPMorgan.

Hi, Andrea.

Hi. Thank you. Hi. How are you? Thank you. Good morning. So, Mike, I was hoping to – if you can comment on the pricing you were able to realize so far in the third quarter. And what is included in your guidance for fourth quarter?

Yeah. Yeah.

And also I would appreciate what half – yeah, so I have a follow-up later. Thank you.

Okay. So on pricing, we experienced positive price. And when we talk about price to you, we talk about net realized price, which is the combination of programming, which is our gross-to-net activities and invoice pricing. We had positive price in the quarter and we expect positive price in the fourth quarter as well. We've had inflations through the year at levels higher than we originally anticipated in resins and energy, and so we priced for both those on costs and for the portion of the tariffs that we've been unable to mitigate through the mitigation actions I described in the script. And we priced in July for those early July tariffs, which were the first round. We've priced again at the end of September for the second round of tariffs; that's the 10% tariffs on what are called the 301 categories. And we've announced pricing for the last round, which is currently slated for the beginning of January on the 301 categories. So we've had generally constructive conversations around these price increases. You have to live through their implementation to be able to declare whether you've been successful at landing those prices and you have to work through those moments. We're in the midst of that on the late-September pricing, and so far so good. And we've had – the normal levels and the appropriate conversations you would expect regarding the January next round of tariff increases. There's some views out there that those may not happen. We've assumed they will and we are planning as such. So hence, we've announced those pricing actions. We've triggered the 60 day to 90 day lead times that we have by contract and we expect pricing to go into effect in early January, and we'll work through the details of that customer-by-customer.

That's very helpful. And the other follow-up that I have is on tax. I appreciate that Ralph had said 30% positive effective tax rate, right? So I'm trying to find the $0.10 improvement in your guidance. Is it mostly related to that – I'm trying to backup, obviously, there are a bunch of moving parts in terms of credits and deferred tax that I saw on your disclosures. Is it fair to say it's mostly because of the discrete item? And also, how much would you say is your effective tax rate now for continuing operations, so that we can kind of model going forward?

Yeah. The tax rate in the quarter was favorable to our expectations and it's really partly related to timing because it is hard to predict exactly when these discrete items fall. So yeah, the benefit, as you point out, that moved the EPS up was largely related to the tax rate on the quarter. I had said that our tax rate for continuing operations for the year would be a benefit in the mid-30s and that's a result of some of the discrete items and some tax planning initiatives that we've had.

Yeah. The only thing I would add to that is that I think it's noteworthy, our earnings – our EBIT came in stronger than our expectations and, obviously, higher than Street estimates. So, there's a blend of underlying sort of organic progression in Q3 and tax, clearly. But I think the headline that we're moving the $0.10 on tax, I think, is the right net headline to kind of embrace.

Yeah. That's helpful. So then, from a continuing – kind of like more normalized way of taxes, should we go back to that number that you initially kind of guided? Or – because I think that, obviously, the goodwill impairment was not anticipated. So if we go back to that kind of normalized tax rate, that should be the one we look kind of like in the outer years, I'm assuming.

You're speaking beyond this year, now? Just to be clear.

Yeah.

I think we've said in the past, on a continuing basis our tax rate excluding discrete items and things that would come up would be in the low 20% range, between 20% and 25%. That's what we've said. And I would continue to model in that way going forward.

Okay, perfect. Thank you very much. Appreciate it.

Thank you. Our next question comes from Bonnie Herzog with Wells Fargo.

Hi, Bonnie.

Hi. So I have a question on your divestitures. Could you give us a status where you're at in the process of executing on the remaining divestitures, and then maybe the pace of announcement that we can expect going forward? And then, I'd really like to hear how confident you are in your ability to hit the $10 billion target. And wondering if you can't get the price you expect for an asset sale or maybe there aren't any buyers, at what point do you make the decision to just hold on to the asset and take it out of discontinued ops? And then, just a final one on this topic, would you consider selling more assets to hit your $10 billion target in case you fall a little short, or just simply live with falling short of your goal? Thanks.

Sure, sure; so, great questions. We're well on our way to deliver the outcomes we committed to, the $10 billion of after-tax proceeds. As you know, we have three processes coming down the home stretch. We've got Jostens underway. We've got Pure Fishing underway. We've got the U.S. Playing Cards business underway, and we're just gearing up on the next round of divestitures. While I hesitate to give you kind of specific answers to the timing question, you should feel relaxed, as we are, that those things will play out as they are ready to play out. And we're not going to compromise value for the sake of timing. That said, there's nothing in the way of having those processes that are well down the curve delivering on the original timetables that we shared with you. So, our confidence – as I said, I've got real conviction around the $10 billion. The processes are working as we would expect. Obviously, there's all kinds of moving parts that happen with every one of these negotiations, as you would expect, and while the way we get to the outcome may change, auctions – process by process, the outcome is within our reach and we continue to be committed to delivering it.

So if I could just, sorry, circle back and push a little bit. If you find yourself, six months from now, you're not getting the price that you think is warranted, I mean, would you consider just holding on to that business? I guess, I'm trying to think through worst case.

So yes. So look we're not going to – we've said right up front, we're not going to – despite all the kind of commentary that's out there in the media, we're not going to do fire sales. So we're committed to getting the right value for these assets. You can look at precedent deals and have a pretty good view of what multiples you ought to be able to get on these different businesses versus peer multiples. And so far we've done extremely well on those processes as evidenced by Waddington and Rawlings. And I think you should expect some that are really strong and others that are more aligned with historical norms. And those will play out as we finish the work. But, look, I'm not at all distracted by what I'm reading in the headlines, that's not the way these processes are playing out. We've had a lot of competitive interest in these assets. And as evidenced by our progress to-date and, you should expect us to continue to have that kind of success.

Okay. That's really helpful. And then if I could just ask one final question on your share repurchases.

Sure.

Given where your stock price is right now, just wondering maybe why you guys aren't being more aggressive with your share buybacks right now? And then how are you planning to balance the deleveraging and share repo through the end of this year and then maybe going forward? Thanks.

Right. So we continue to be committed to allocate the net proceeds after-tax to both delevering and repurchasing shares. Obviously, at $16, $17, $18 a share we're deep value right now, so this is the sale of a lifetime, which is exciting in some ways and in other ways not so exciting. But we have the good fortune of having a strategy that has us bringing a significant amount of proceeds in the very near term and those proceeds are going to be put to work in the way we suggested they would be put to work. So the good news is when we did our original work and thought about where our share price was going to be when the proceeds became available, we weren't ever envisioning $16 a share, or $17 a share, or $18 a share. So those proceeds have even more leverage than they previously had and we're looking forward to applying the capital once we have the opportunity to do so.

All right. Thank you.

Thanks, Bonnie.

Thank you. Our next question comes from Lauren Lieberman with Barclays.

Hey, Lauren.

Great. Thank you. Good morning. Hey. So first thing was just when you guys talked through the impairment charge, you've mentioned the market cap of the company, but also a change in cash flow projections versus where you were a year ago. So I just want to confirm kind of what that long-term cash flow projection is now, which also may well not have changed versus two months ago, I realize it's an annual task. But I just wanted to double check on that.

Yeah, Lauren, I'd separate our impairment testing from because my comments were really relative to the impairment test that we did a year ago. And so as we looked at the projections on the businesses we did update those internal projections again versus last year and feel frankly we've made reasonable estimates and been prudently conservative in terms of that outcome. And as both Mike and I mentioned again the majority of the charges related to the current market cap of the company on it. So it's really a reference to what was used in the impairment test last year was – is as we updated the projections.

Okay. So no change in terms of what we all would be expecting vis-à-vis conversations we've had with you publicly over the last couple of months?

No. I think, Mike talked about just earlier the outlook of the company, and how we see it over the next couple of years.

Okay. All right. Can we just talk a little bit, I guess, about Appliances and I wasn't sure of in the language in the release, if there were incremental distribution losses or if this was just kind of a continuation of what started earlier in the year?

Yeah.

And just talk a little bit about any visibility you have into shelf space from – you know, promotional space and so on?

Sure.

And then the online versus the offline activity around the Appliance business in the fourth quarter? Thanks.

Yeah. I think, the issue we have in Appliances is similar to the issue we have in Outdoor and in the reset windows from spring, we lost distribution on a couple of products categories in Appliances in coffee and in what we call cooking appliances at a mass, big mass retailer and same thing on coolers within Outdoor. Those losses were in the spring reset. And so what we've been experiencing through the entire year is lapping the comparators to a period where those – that distribution was in place. And as we come through the fourth quarter into the first and second quarters we fully lapped on both businesses those issues. On Appliances, I think, there's more to sorting out that – those brands and our opportunities there in the U.S. than simply lapping distribution. That's why the innovation that we're beginning to bring to market is so important to the renovation of those brands. And so these are excellent assets with great equities, but those equities are latent. We need to apply the brand development agenda that we applied to brands like Graco and brands like Paper Mate over the last number of years to brands like Crock-Pot, to brands like Mr. Coffee, to brands like Oster in the U.S. And that's the work you're starting to see flow into the marketplace with the innovations I spoke to. That pipeline is full and we need to continue to develop it and we will. The other thing that we need to do on appliances in particular is make sure that the consumer can find the broad assortments that we will be launching on these brands in the U.S. And that's where it becomes really important for us to leverage the digital shelf which is way more broad than the physical shelf in brick-and-mortar environments. It's important for the consumer to see the offerings we got and we'll bring to market on brands as we premiumize through functionality, form and finish these brands. And so e-commerce is an incredibly important element to the renovation of our appliance brands. And the team is working really hard to both land our innovations in the physical environment of brick-and-mortar while leveraging the e-environment in the digital shelf to profile the full assortment that we've got available. And I think it's the combination of those two things on Appliances that will be critical to our success going forward. That's why it takes a little bit more time I believe to get appliances up to its full potential. But I think you should still see sequential improvement in part through the innovation we're launching today when coupled with a more successful distribution outcome in 2019 across the business. And of course, we've got a beautiful business in Latin America that's doing extremely well, run by a really investable team and leader. And we'll continue to invest there and the same in Australia, New Zealand. So we have a broader business and simply view as the thing we tend to talk about is the U.S. opportunity. But that's the story on Appliances and we're glad to be through this start-up window and our brand development agenda in that business, and we're glad to start to see ideas like HEATSOFT technology on Oster hand mixers and the line of Teflon appliances that leverage all the equities of our cookware business now come into the space. And you should expect more from us as we move forward.

Okay. Thank you so much.

Thank you. Our next question comes from Steve Powers with Deutsche Bank.

Hey, great. Hi guys, good morning.

Hey, Steve.

Hey. So first just a couple of cleanups on the fourth quarter guidance and then I have a follow-up. But on the cleanups, I think, the guidance implies about $700 million to $1 billion in fourth quarter operating cash flow. Just curious given where you stand now is there a reason to favor the high end, the low end, or is the midpoint a good reflection of your current plan? And then also you may have mentioned this, but just do you have an expectation for how much discontinued ops might contribute to your fourth quarter net income?

Yeah. So on operating cash flow, we've held our guidance range of $900 million to $1.2 billion. Obviously we had a very strong performance in the third quarter, part of that working capital-driven and some of that will kind of reverse out into the fourth quarter. But we know we're clear, we're beginning to get – make real traction here on the working capital front. We have a lot of room to run as you know with working capital optimization. So we expect to continue to reduce inventories into the fourth quarter. And the work we're doing on complexity reduction going forward will in 2019 enhance our ability to make further progress. As I mentioned on payables, the procurement team is doing a nice job of both renegotiating and leveraging our scale to get fine synergies that flow through to the P&L. But as they're doing that they're also renegotiating payment terms with our sourcing partners. And particularly in Appliances, we're getting some big wins on extended payables terms through the procurement work. So we're beginning to make progress. I think this is an area of focus and intense – significant opportunity and you should expect us to make more going forward. But I do think that we've held guidance for the full year. You'll see some timing shifts from Q4 into Q3. But on balance we feel good about the progress we're making on cash flow. And obviously that's really important to the overall capital deployment strategy that we have. Ralph, I don't know whether you want to handle the other.

Well, we're not really guiding specifically on discontinued operations, but it's clearly reflected in the range that Mike alluded to.

Yes. I think the thing to think through is how you – if you're measuring progress quarter-to-quarter, I think you have to think through the timing effect of assets sold and how their income flows out of our disc ops P&L. So clearly Waddington and Rawlings were out of the P&L for the entire third quarter, but Goody was not. Goody sold later in the quarter. That will have an impact in Q4 and depending on timing on any of our other processes that might have an impact as well. Our guidance assumes we're holding with everything that's held through the end of the year, if something gets done faster there will be some impact to disc ops. But obviously we would prefer to get the processes done and reallocate the capital given where we are.

Okay. Okay. And then you mentioned anticipated step up in A&P in the fourth quarter. And I guess, the question is...

Yeah.

Is that always planned? Or are you spending back some of the upside you might be getting from Writing improving a bit faster-than-expected just to put yourself in a better position in 2019? And I ask that question just because stepping back from the outside I think there's some perception that just about everything Newell has been doing the last 12 months has been focusing on the here and now, fighting fire, trying to get back to the state of relative normalcy.

Sure. Yes.

And maybe there's some truth in that, but I was hoping you could just also talk about how much time the organization may have had to devote to longer-term planning setting out for future growth because, clearly, it's important to return to that stability, but then once we're there I guess what I'm trying to get at is how a position you think you are to resume growth. And can that pivot happen in 2019? Or is it going to take more time?

Yeah. I mean, we've said that our – we said and I've communicated this in multiple occasions, but we think this business requires A&P spending between 4% and 5% of revenue. And in the third quarter, we spent in that range. So the third quarter wasn't unusual relative to our normal range of spending; although, it was down versus prior year because, if you recall, prior year we got hung out without delivering the revenue, but you commit your spending well in advance. And so, that was the dynamic that was unique to Q4. But we're not changing the way we think about brands and spending on the business. The marketers are focused on building their businesses and their brands over time. We're spending more in Q4 because money flows to ideas. And we've got a number of really interesting innovations that are unique and will benefit from us building awareness and driving trial on them. And we'll get the annuity of future purchases, repeat purchases or gifting purchases going forward, based on word of mouth and the experience that consumers have with the ideas we're bringing to market. So our logic around the fourth quarter really isn't – it's not about trying to spend to develop the category for the next quarter. It's actually tied to the marketing programs we've got on these new product launches, and the seasonal spend associated with things like Yankee Candle and the Appliance businesses in the gifting season. So we've got a lot of good ideas that are flowing to market. We've backed them up with money, which you should expect us to continue to do going forward. Q2, Q3, Q4 tend to be our higher-spending quarters, Q1 – because that's when the consumer is looking for our categories, and Q1 tends to be the lower spending quarter. And that's the way you should expect our A&P to flow over time. You should also expect us to spend between 4% and 5% and, depending on how much progress we make on cost and margin, we will have flexibility to spend more towards the high end of that range in any given quarter; or, if we got ideas coming, we'll spend to the high end of that range. And when we – and so, there's incentive on the part of the marketing organization – the divisions to find the room in their P&L to invest. Clearly, our focus has been across those five priorities that I described to you. And one of them is cost and one of them is cash; one of them is profitable growth. And so, those three agendas all intersect to create the brand-building work we do.

Okay. Thank you so much.

Yeah.

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

Good morning.

Hi, Olivia.

Hi, Mike. I want to get back to core sales, because you do seem more optimistic than you were last quarter, given quite a few initiatives and the pricing. And we're also one quarter further removed from the Writing reset and the Toys 'R' Us liquidation. But you aren't committing to the growth that you felt comfortable with three months ago, so just trying to understand what's changed over the course of the last three months that makes you less comfortable with committing to that low single-digit growth target that you voiced last quarter?

Yeah. I think that's a good – a fair question. We've got – I just want to make sure we give ourselves the room to succeed. And overpromising and debating tenths of basis points of core sales growth when every tenth represents about $9 million of revenue, which is about four hours of daily sales, is not a situation I want to find ourselves in going forward. That said, there is – I think it's going to take a little bit longer on Appliances and on Coleman to kind of deal with some of the challenges we have in those businesses. I don't want to rush the work in Europe on Home Fragrance Europe, where we're trying to unwind a set of tactics that I don't think are sustainable. So if I put pressure into that system for them to solve that problem quickly, we end up actually not getting the margin benefit we hope to get. And I think we got to see those things all the way through before leaning our shoulder into getting the growth. And so, I mean, there are things like that that cause me to be a little bit more cautious. But they are on the edges and we're taking a lot of price connected to tariffs. And look, you don't – you can't really fully account for the volume sensitivities and elasticities associated with those pricing actions. So giving ourselves a little bit more breathing room for the price vol mix kind of play out in the marketplace given the sequential pricing we've taken, I think, is a prudent thing to do.

That's helpful. Thank you, Mike. And then, if I could just switch over to a quick housekeeping on gross margin. Can you guys break down the drivers between pricing productivity, FX, et cetera, just so that we can better understand the path going forward?

Yeah. I think the biggest contributors in the quarter – underlying contributors were pricing and programming. And productivity – gross productivity and the flow through of productivity to gross margin is accelerating, particularly what we call VAVE, which is the work we do on packaging cost, the work we do on our product design costs. Those should continue to get traction and accelerate through the fourth quarter into next year. Procurement is another source of savings to gross margin and it's obviously been a big contributor over the last number of years to our synergy delivery. Procurement will continue to play a role, as I was mentioning, on those sourcing contracts. They're offset by higher inflation in resin and in energy; although, it's intriguing to see what's happened the last couple of days on energy prices. We'll see how that plays through to the market; and clearly, tariffs which has been sort of this dynamic situation. So we were pleased with the outcome on gross margin in Q3. Part of that was driven by the recovery in Writing, and the over delivery on Writing, but some of that Writing mix benefit was offset by Home Fragrance not delivering its numbers. And so, it sort of washed out. But going forward, I think mix has the potential to play a role in a way it hasn't up until now as Writing gets into a more consistent rhythm of growth, and we lap some of the Home Fragrance headwinds related to getting into a more virtuous rhythm of growing in Europe that is more profitable. And so, we'll see. We'll see how that plays out, but those are really the moving parts within gross margin that we have to keep a close eye on and that we will manage very actively.

Got it. Thank you.

Thank you. We have time for one more question. Our final question comes from Nik Modi with RBC capital.

Hi, Nik.

Thanks, good morning. Hey, Mike. How are you? Just I was hoping you can just give some context on the CFO search. I know we're getting to the end of the year here, so just wanted to see if we can get an update on that. And if I could just squeeze another one in on your Writing business in Latin America and if you can provide some context on how that's doing at the moment. Thanks.

Yeah. Yeah, sure. So our Writing business I'll start with the second part of the question and close with the first, Nik, if you don't mind. The Writing business in Latin America has not had a good year in 2018. In part because there was a dynamic that was happening out of Latin America that was creating pricing problems in North America in the e-commerce marketplaces. And so we pulled back hard on the throttle this year in Latin America to eliminate and dry up the 3P sales that were finding their way into the U.S. and creating issues for our 1P sales on e-com marketplaces whether they were retail.com or Amazon. And so our logic for this was we want to get the ASPs, the average sale price up so that our partners can achieve their – our strategic partners can achieve their margin expectations and therefore allocate our gross-to-net programming to programming as opposed to inside margin. That's a lot of detail and I'm sorry for that. But Latin America Writing had a down year as we cleaned up a whole bunch of noise that was hurting our ability to drive profitable sales through our e-com marketplaces in the U.S. That work is largely behind us, so the good news is we come out of the third quarter and can start to more profitably grow and we have to maintain the disciplines in Latin America to avoid the diversion issues that created problems for us in North America. So on Writing LatAm that's the commentary we'll provide, and I think, we're going to find ourselves in a better place going forward. On the CFO search, we're well on our way. We've had good engagement with a number of candidates both internal and external. The Board is engaged in the process and we're coming down the home stretch.

Thanks so much.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will now turn the call back to Mr. Polk for closing remarks.

Well, what I would like to say actually if I don't see any names in the queue is I'd like to say something to our people, which is, thank you. The kind of determination, perseverance and drive for results that you've demonstrated through an incredibly difficult chapter in our history has been remarkable to be part of with you. And I can't tell you how much of an asset that is to our company going forward. And I'm looking forward to putting another quarter of progress on the board in the fourth quarter and then turning the page to 2019 and getting back into a more normal rhythm of performance that we've all become accustomed to in our recent history. So, thank you for that and thank you for all of our investors that have been patient with us through this period of time.

Ladies and gentlemen, a replay of today's call will be available later today on our website at newellbrands.com. This concludes our conference this morning. You may now disconnect.