Q2 2019 Earnings Call
Ladies and gentlemen, you were currently on hold for Newell Brands' second quarter 2019 earnings Conference call.
At this time, we are assembling today's audience and we plan to be underway. Shortly we appreciate your patience and please remain on the line.
Ladies and gentlemen, good morning, and welcome to Newell Brands' second quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode.
After a brief discussion by management, we will open up the call for questions.
In order to stay within the time scheduled for the call. Please limit yourself to one question during the Q when a section.
As a reminder, today's conference is being recorded.
A live webcast of this call is available at Newell brands Dot com on the Investor Relations home page under events and presentations.
I will now turn the call over to Nancy O'donnell, Senior Vice President of Investor Relations Ms. O'donnell, you may begin.
Thank you good morning, and welcome to Newell brands 2019 second quarter Conference call.
Chris Peterson, our interim C. C O N C F oh, well be hosting the call today.
Before we begin let me remind you that this conference call will include forward looking statements.
These forward looking statements involve risks and uncertainties and actual results may differ materially from our expectations.
I refer you to cautionary language available in our press release and in our SEC filings that describe these risks.
During the call. We will also use certain non-GAAP financial measures, which we refer to as normalized measures.
We believe the supplementary information is useful to investors, although it should not be considered superior to the measures presented in accordance with GAAP.
You will find reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in today's earnings release tables as well as on the Investor Relations website.
And of course in the company's SEC filings.
I'll now turn our call over to Chris.
Thanks, Nancy and good morning, everyone. The second quarter results, we announced this morning reflect strong progress across all key metrics, we are making decisive and strategic choices to turn the company around and drive shareholder value as we work to transform Newell brands into the leading next generation consumer products company.
Results were in line or ahead of our expectations on all key metrics four out of seven continuing divisions delivered core sales growth in the quarter.
We were ahead of plan on operating margins driven by better than expected gross margins and lower overhead costs.
Productivity and cost controls are taking from hold and tracking ahead of schedule.
Normalized earnings per share benefited from pricing productivity and mix. In addition, the disciplined cost management.
Operating cash flow improved $180 million versus the year ago quarter to positive 191 million, reflecting strong execution on working capital initiatives.
While it's still early in the year. The progress we've made to date on the working capital side as well as tax planning initiatives give us the confidence to raise our full year outlook on cash flow from operations.
Before going through the results I want to provide some context on the progress we're making on the turnaround plan.
Over the last few months, we've developed a bold and aggressive turnaround plan focused on five priorities.
Returning the company to profitable core sales growth, improving operating margins through productivity and overhead cost savings.
Accelerating cash conversion cycle through working capital transformation.
Strengthening the portfolio of brands and businesses in which we compete and building a winning team by significantly improving employee engagement.
On the first focused profitable growth, we are starting to see see green shoots across the divisions.
We returned to core sales growth in four of our seven divisions this quarter.
POS is now growing at our top four customers in both Q2 and year to date.
Our E Commerce business grew high single digits in the second quarter, and we returned to core sales growth in the international business. We've got more work to do to expand the success across the broader range of customers and categories, but were encouraged by the progress we're making.
To win today in a fast moving Omnichannel world. It is critical to engage the consumer at all moments that matter and the path to purchase and Omnichannel marketing is a crucial link in that journey to that end, we have undertaken a concerted effort to retool marketing and build out our social and digital marketing capability, creating a digital first mindset.
For example, among other things Weve now created a social and Influencer marketing playbook.
And increased Influencer marketing spend fourx versus 2018, with 30 influence or events planned for the back half of the year. We think these initiatives will be additive to our efforts to improve purchase intent for our products.
On our second strategic priority optimizing the cost structure, we are executing on a number of cost reduction and simplification initiatives. For example, during the first half of the year, we took out more than 12000 skews across the organization or about 13% with concrete plans in place to get to the 50% target by the end of next year.
We've also made good progress on moving obsolete inventory, which helps both our working capital and SK you reduction efforts.
Over the past several months, we have successfully implemented three S&P conversions, the U.S.U.S. fresh preserving business the Coleman business in Australia, New Zealand, and the appliance and cookware business in EMEA.
We have another S&P conversion scheduled to go live in appliance and cookware and Asia shortly.
Next year, we'll tackle the remaining six implementations and by the end of next year more than 95% of the company's sales are expected to be onto ERP systems.
We continue to make progress on reducing systems complexity and standardizing systems across the organization.
We are on track to cut IP business applications by 85% by the end of next year as we remove redundancy simplify the ITC footprint and reduce cost.
We also implemented a new ecommerce digital technology strategy through which we are consolidating over 12 different architectures into a single new technology stack with superior capabilities and new tools to support the marketing reinvention effort.
As part of this process, we have made significant headway in rationalizing the number of sites that we have with the goal of converting the sites for the vast majority of the companys brands toward being more focused on showcasing new product innovation and brand storytelling, rather than highly discounted commerce and fulfillment sites.
This approach provides significant cost and complexity reduction and a better experience for consumers.
We are also taking steps to simplify the supply chain during the second quarter, we announced the closing of three manufacturing plants and 10 distribution centers, representing an 8% reduction in the company's supply chain footprint.
Driving improvement in our cash conversion cycle as our third strategic priority, we took strategic actions to accelerate the company's cash conversion cycle, which culminated in a stronger than planned cash flow delivery. This quarter on accounts receivable, we entered into a more cost effective program for accelerating receipt of payments and we improved customer terms compliance by strengthening the company's deduction resolution process, thus clearing customer deductions faster.
On the payables front, our procurement team has renegotiated contracts with hundreds of our top suppliers and have extended payment terms for more than 2000 of our smaller suppliers to benchmark levels, which in total represent roughly one third of the companies spend.
Negotiations with strategic suppliers continue to take place.
As and as mentioned the progress made on SKU reduction benefits inventory management.
Relating to our goal of strengthening the portfolio. The company closed on the process solutions and Rex Air transactions in the second quarter and entered into a definitive agreement to sell the U.S. playing cards. The cards on Monday group with that transaction expected to close in the second half of the year.
Utilizing proceeds from the completed divestitures the company reduced net debt by $777 million in the second quarter.
We also announced an update to our divestiture program. This morning. Following an in depth review the company has decided to keep the rubbermaid commercial products business.
As I was able to learn more about this business and spend time with the team I have a strong conviction that RCP will create more value as part of our ongoing portfolio.
The commercial business has a leading competitive position across attractive large and growing categories and the RCB RCP brand commands one of the highest perceived quality scores annuals portfolio.
It's responsive to branding and innovation with product differentiation being a key driver of success. It generates strong cash flow with margins that are accretive to the total company average and it is accretive to both earnings per share and cash flow in 2020 and beyond.
We still plan to pursue divestitures of Mapa spawn techs and quickie and we expect to be in a position to close those transactions by the end of this year at which point the accelerated transformation plan will be complete.
We currently project that the remaining divestitures that are yet to be completed will generate between 675 and $775 million and after tax proceeds.
All divestiture proceeds generated in 2019 will be directed toward debt pay down as we are prioritizing strengthening the balance sheet and maintaining our investment grade rating.
As a result of our decision to keep RCP, we now expect to attain a gross debt to EBITDA leverage ratio of less than four times by the end of this year and reached three and a half times by the end of 2020.
We have spoken to the rating agencies about this change and shared with them the strategic rationale for the decision as well as the financial ramifications.
And our view with the RC CP business being accretive to margins earnings per share and cash flow the decision to keep the business strengthens the company for the mid to long term.
And lastly, but perhaps most importantly, we are focused on building the team and reigniting employee engagement.
The senior leadership team has become more visible and connected with the organization through a number of face to face meetings global town halls, Webcasts and video communications and through our employee App as a result of these efforts and of the excitement generated by early signs of the turnaround taking hold employee sentiment is improving.
Based on our tracking of internal feedback employee engagement has increased between 25 and 40% versus the year ago period on certain key measures such as confidence in leadership and the future of Newell. There is more work to do here.
Two but this type of progress is encouraging.
On this engagement front, we made a strategic announcement this morning.
We have decided to move the corporate headquarters to Atlanta.
Three of our seven operating divisions, writing baby and food representing over half of the company's profits are based in Atlanta today with approximately 1100 professional employees located there.
I see significant value in moving the executive management team closer to the business as we endeavor to improve operating performance. In addition, I believe working in close or physical proximity will promote better team work and communication and provide more opportunities for career advancement for our people.
The move generates overhead cost savings, although that is not the primary driver of the decision.
We will be transitioning to the new headquarters over the next few months and look forward to hosting many of you in Atlanta in 2020.
Earlier this week the company announced that the board has appointed Ravi Saligram as Newell brands, New CEO and board member effective October 2nd.
I assume you've all had the opportunity to read the release, so I won't take time today to walk through the details of his impressive resume.
I will comment that I've met Ravi and we've had multiple conversations since my remit. During the transition is to continue to drive forward with the transformation of our business with a focus on the five priorities I shared earlier my conversations with Ravi and the board have all been supportive of those goals I look forward to partnering with Ravi in the rest of the leadership team to further our transformation agenda and drive value creation.
Let me turn now to a detailed review of our Q2 financial results.
Net sales from continuing operations declined 3.9% versus last year to $2.1 billion, reflecting a nearly 2% headwind from foreign exchange the closing of more than 70, Yankee candle retail stores year to date and a 1.1% decline in core sales, which was in line with our outlook with four out of seven divisions growing in Q2, including writing Baby home fragrance and connected home and security. We are pleased with the sequential progress the team is delivering.
Productivity price increases and mix more than offset the negative impact of inflation tariffs and foreign exchange driving a 50 basis point improvement and normalized gross margin to 35.6%.
In recent months the company has significantly ramped up its efforts surrounding productivity with the funnel of projects up 33% versus year ago and continuing to build.
Overhead costs were down 110 basis points versus year ago, driven by tight cost controls and restructuring actions strong gross margin performance in combination with the meaningful reduction in overheads drove a 160 basis point improvement in normalized operating margin to 11.3%, which was ahead of our plan.
We are moving quickly to drive the turnaround of Newell brands and optimize the cost structure with progress evident in the first half results and additional work streams underway.
Debt pay down over the past year resulted in net interest expense savings of $42 million versus last year, the normalized tax rate was 25.4%.
Normalized net income from discontinued operations was $69 million below $282 million in the year ago quarter, reflecting loss contribution from seven completed divestitures, which include the Waddington Rawlings goodie pure fishing jostens process solutions and Rex their businesses.
At the end of Q2, we had 424 million diluted shares.
The company delivered normalized diluted earnings per share of 45 cents, which was ahead of our guidance range due to better than expected operational performance normalized diluted earnings per share from continuing operations increased 45% versus year over year.
To 29 cents.
Now on to segment results.
Core sales for the learning and development segment grew 3.5% core sales growth was broad based as baby returned to growth this quarter, having fully lapped the disruptions stemming from the T. argue bankruptcy.
The team has re energized and focused on sustaining this momentum with exciting new product launches hitting the shelves, including a full relaunch of the iconic baby Jogger city many platform.
The writing division maintained its core sales growth momentum our back to school sell in shifted slightly earlier than expected in line with the timing of last year.
We think our brands are well positioned to win during the back to school season.
This division is among our first adopters of the marketing pivot toward Influencers with exciting activity planned in the coming weeks and months.
Core sales for the food and appliances segment declined 7.1%.
As anticipated the food division was negatively impact impacted by the shift of orders on the fresh preserving business into the first quarter ahead of the April Onest implementation of S&P.
The appliance and cookware division remained under pressure.
Although we are seeing some traction in terms of Pos and share development from recent new product activity, including the refresh of the Mr. coffee line, we need to broaden the innovation pipeline across the entire portfolio, which will take some time.
Core sales for the home and outdoor living segment were down 1.1%.
The home fragrance business reached an important inflection point and returned to core sales growth driven by strong performance in EMEA.
And distribution gains for woodwork across a number of retailers the connected home and security division maintained its growth momentum.
Core sales for the outdoor and rack division were down year over year, but now that the business has lapped major distribution losses, we are starting to see a sequential improvement and share trends as well as in Pos.
Moving on to cash flow.
The company maintained the momentum from the first quarter and generated operating cash flow of $191 million, an increase of $180 million year over year and ahead of plan.
This improvement reflects benefits from the strategic actions taken to improve working capital, including negotiation of more favorable payment terms as well as a decrease in receivables.
Year to date operating cash flow was $380 million better than a year ago. As we have stated previously we are still in early innings of working capital transformation and continue to see significant opportunity ahead and unlocking the cash generative power of the company.
Let's now turn to guidance.
First let's talk about what changed in our 2018 base year results in the press release release, we have provided supplemental information, which shows the impact of including RCP and continuing operations for Q3 and full year 2018.
As you can see that change is accretive to net sales and operating margin, but has a slight negative impact on normalized EPS moving the RCP business from discontinued operations to continuing operations requires the company to restart depreciation expense because in accordance with GAAP assets held for sale are not depreciated.
The depreciation expense for RCP is approximately $35 million on an annualized basis or six cents per share.
The move has no impact on operating cash flow.
Our updated outlook for Q3 and full year 2019 will be based on a comparison with the metrics in the supplemental schedule.
As for our outlook for Q3 and full year 2019, we will report RCP as a part of continuing operations beginning in the third quarter.
Our revised guidance reflects the incremental annualized noncash depreciation expense of approximately $35 million for RCP. Our previous guidance did not include this expense.
With that frame of reference I'll walk through our updated outlook for Q3 and full year results.
For 2019, the company expects to deliver net sales of approximately $9.1 billion to $9.3 billion reflect reflecting a low single digit decrease in core sales growth and a roughly 150 basis point headwind from foreign exchange.
Normalized operating margin is expected to grow 20% to 60 basis points year over year to 10.4% to 10.8%.
This outlook continues to assume that price increases productivity and a reduction in overhead costs offset the unfavorable impact from inflation tariffs and currency, while simultaneously funding additional NP investment.
We expect a normalized effective tax rate for continuing operations in the low double digit range.
And normalized diluted earnings per share for the total company between $1.50 and $1.65.
Other than the incremental depreciation expense there is no additional impact on EPS from the decision to retain the RCP business as we had previously assumed it would be sold at the end of the year.
So in effect, we are increasing our pretax income guidance on the underlying business by about $35 million to offset the incremental noncash depreciation expense.
This outlook assumes no share repurchases in 2019.
We are raising our forecast for cash flow from operations by $300 million.
To a range of $600 million to $800 million, reflecting better than anticipated progress on the working capital side as well as anticipated benefits from additional tax planning initiatives.
This updated forecast includes approximately $50 million in cash taxes, and divestiture related transaction costs and about $200 million of restructuring and related cash costs.
As we look to the third quarter. We currently expect net net sales in the $2.42 billion to $2.47 billion range with core sales declining 2% to 4% and a nearly 100 basis point drag from currency. This is in line with our annual guidance and reflects a sequential improvement from the first half of the year and two year stacked core sales growth trends.
We have planned for a 100 to 130 basis point year over year decline in normalized operating margin to 11.9% to 12.2% as a significant ramp up and a and p. spending in Q3 will more than offset sustained progress on overheads.
The normalized effective tax benefit for continuing operations is estimated in the high single digit percentage range, reflecting expected discrete tax benefits.
This yields normalized diluted earnings per share for the total company within a 55% to 60 cents range with a diluted share count some that's similar to Q2.
In closing we are encouraged by the broad progress the organization is making toward transforming newell brands into the leading next generation consumer products company.
We remain steadfast in our ambition to drive shareholder value creation through a return to core sales growth ahead of industry averages operating margin expansion and an improved cash conversion cycle.
We are on track to complete the divestiture program by year end.
We expect to deliver sequentially improved core sales and operating margin results versus 2018, while overcoming significant external headwinds from inflation tariffs in foreign exchange and simultaneously continuing to support the companys brands and innovation in the marketplace.
We are also taking conservative steps to strengthen the company's working capital metrics and drive operational discipline across the organization.
I'm encouraged by the early progress and excited about the opportunity before us.
With that I'll turn it over to the operator to begin doing.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach your equipment.
Again, it is star one if you would like to ask a question.
And your first question comes from Bill Chappell with Suntrust.
Thanks, Good morning.
Morning Bill.
I first welcome back to Atlanta.
Not sure New Jersey has been great for your stock price, so much better coming back to Georgia.
Exactly.
Yeah, just a little bit more around rubbermaid commercial decision.
And just trying to understand.
I thought over the past I guess year year, and a half part of the reason why that was taking longer to actually sell was it had to be split off you had to do a lot of work to kind of carve it out and so didn't know if there you know have to reverse engineer bring it back within the organization and then also a little bit more thoughts on was it just you weren't seeing offers that were of the right value or are you really felt like this was an integrated part of the risks of which is more consumer facing business.
Yes.
Vera let me try to provide a little bit more perspective on the decision. So the rubbermaid commercial products Division as I mentioned is one of our strongest businesses. If you look at the brand equity scores. The Rubbermaid brand is in the top three of the Companys brands relative to.
The the perception quality scores with consumers.
It was always slated as part of the ATP plan to be one of the last divestitures.
That the company marketed and in fact.
The company never started really the marketing effort for the RCP business. So so we didnt take it to market.
The good news about it is as we got into it because it's a strong business that generates strong operating margins strong cash flow.
We believe that keeping it in the portfolio is going to drive significant value creation and let me just provide a couple of statistics. So while you can see from our from our updated guidance is that keeping the RCP business improves the operating margin of the company for 2019 by 110 basis points, which is driving the improvement in our operating margin guidance.
Additionally, if you look at the implied guidance for continuing operations, keeping the RCP business in the portfolio drives our earnings per share from continuing operations for 2019 up by almost 40%. So it is a huge improvement in the underlying earnings per share from continuing operations to keep the business versus sell the business. We never got fully started on the separation activities and so we believe that the.
Just that the now that we've made the decision to keep the business.
We think there is some opportunity to drive additional cost savings.
In the primarily in the supply chain of that business, but but it will eliminate the need for us to do a lot of separation work that we would have had to do if we if we continued down the path of selling the business.
Got it thanks for the color.
Your next question is from Andrea Teixeira with.
JP Morgan.
Thank you good morning.
So my question just following up to Bill's question on Rubbermaid commercial.
What what is the run rate I'm, assuming that obviously the top line was not attractive and besides the fact that is not customer facing.
I get the point about margins obviously.
What is the top line growth.
Stand right now and where you think you can take it.
You can give us like you gave.
Could you give a good.
So what's happening at the the appliances business.
Where we're going I think that you can reinvest part of these marching into the business and where you think we can see stabilization of the trends on the on the top line for that.
One.
Thank you, yes so.
Moving the rubbermaid commercial business back into continuing operations.
We've kept our guidance for core sales growth for 2019. The same so it doesn't really have an impact on the core sales growth guidance for the company.
Our guidance at the beginning of the year was for core sales to be down low single digits now that we are including it in core sales were maintaining that guidance of down low single digits. So we don't see the decision to include rubbermaid commercial back into continuing operations, having a material impact that being said.
Within the Rubbermaid commercial products business Theres really two different businesses. There is a commercial business, which represents about two thirds of the business that has been growing over the last number of years.
At or above the rate of GDP and that's the business that is very strong very profitable and we see strong growth prospects going forward.
For there is also a smaller part of the business Thats, a consumer facing business focused on outdoor and.
Garage and refuse.
And that part of the business is a lower profit margin business that we've been focusing on rightsizing.
And I think we've made very good progress there and so I think that.
As we look forward, we think that there's still some.
Optimization work on the consumer part of the business.
But I think we feel like we can drive that business back to growth in the relatively short timeframe here.
Once we get through that Rightsizing activity.
Non RCP.
Relative to reinvesting back in the business.
I think I mentioned in the prepared remarks that.
We're guiding the third quarter margin down versus year ago.
By 100 to 130 basis points for the total company and that really is entirely due to an increase that we're planning in the third quarter in advertising and promotion spending.
In and the third quarter as you know is a big quarter for us from a seasonality perspective, because you still have the.
Businesses that our summer seasonal.
In the third quarter, you have the back to school period in the third quarter and so the ramp up that we have versus year ago, and advertising and promotion spending is focused on our strongest businesses were planning to.
Increased advertising and promotion spending in the third quarter.
Against our writing business against our.
Outdoor and rec business and against.
A number of our other businesses, where we have strong innovation momentum.
And to keep the core sales growth trend going in those businesses.
And just to be clear group does its very helpful. The 100 BP increase over a year ago is relative to the base that is already including.
Thats fully comparable including commercial RCB back right.
Correct. So if you look at the guidance chart that we put in the press release, what you can see is that we have increased the guidance range for the full year 2019 versus 2018 by 110 basis points in that 110 basis point increase is entirely due to including the RCP business and what we've done is we've included it fully in both years, including and the normalized impact of the annual depreciation expense in both years.
So it's an apples to apples comparison.
Okay perfect. Thank you very much.
Your next question is from Lauren Lieberman with Barclays.
Thanks, Good morning.
I'm sorry to go back to the commercial products question, but.
One of the things that we're excited and the decision to include that business from the divestitures had been the notion of.
Complexity of the portfolio.
And that.
And of course when that.
That it certainly is a change in course, so I just wanted to know if you could comment on.
How you're thinking about portfolio complexity, and having this sort of standalone industrial facing business versus the rest.
Consumer facing thanks.
Yep.
So.
We've looked at the complexity reduction and and interestingly keeping the rubbermaid commercial products business doesn't significantly change the complexity reduction metrics that were previously shared.
And part of the reason for that is because the rubbermaid commercial business is already relatively integrated.
From a supply chain standpoint, with the rubbermaid consumer business that the company was planning to keep and so.
Selling the rubbermaid commercial business would actually have required a separation activity that would have.
In some cases added more complexity.
During that.
During that period. So if you look at the premise of the original ATP plan in terms of SKU count reduction manufacturing footprint reduction exposure to resin the decision to keep the rubbermaid commercial business.
It really doesn't change the picture with regard to any of the complexity reduction metrics.
Relative to a the question on the commercial facing part of the business I think as I've gotten into it and looked at the business.
The thing that I was looking at was.
The Rubbermaid brand plays across both commercial and consumer facing businesses and if you include our food business in that.
The Rubbermaid brand is probably 50 50 between.
Commercial and consumer.
Facing businesses and the Rubbermaid brand is and driving branding and innovation applies equally in is a critical skill thats required in both the commercial business and the consumer business. So we think that.
The fit with our core competencies is very strong.
Across the entire rubbermaid businesses.
Okay. Thank you.
And.
If I can.
One more.
Just the retail closures, there's obviously a lot of the ongoing movement in the brick and mortar landscape and to your question is around.
That back and JC Penney.
How are you thinking about that in terms of impact on whether it's your building and things for this year plans you're planning on it for 2020.
And maybe in particular, how you might be approaching the planning cycle differently.
Then what might have been done at the company previously given this sort of.
It's ongoing.
Well they are the changes the landscape.
Yes, it's a good it's a good question and it's something that we are.
We are very focused on and so I think one of the things that's very encouraging about the results in the second quarter is that if you look at the company's top four customers were back to point of sale growth in the second quarter and year to date in all four of those customers, which we believe are winning customers in the.
Retail environment that is being radically disrupted.
With digital and E Commerce shopping trends. We also are excited that we're back to high single digit growth.
In the E Commerce business and we're back to core sales growth in the international business and so the way we're thinking about the business is very much planning for the retail disruption to continue my view is that.
We need to be thinking about where the retail environment is going to be over the next three to five years, and then making our investment choices. So that were playing to win where the market is going to be and so our strategy is to.
Invest in winning customers to invest in digital and e-commerce to invest in growing the international business and to manage.
Appropriately the decline in retailers that.
That unfortunately are are being disrupted and losing share.
In.
In the marketplace.
Okay. Thanks, so much Chris I appreciate it.
Thanks Lauren.
Your next question is from Steve powers with Deutsche Bank.
Hey, Thanks, Good morning, Chris.
Good morning can you maybe just to.
Maybe just to round out the RCP discussion when you parse out all the moving parts are you able to isolate it all with what portion of the the updated 600 to 800 million in operating cash flow you can now attribute to continuing ops inclusive of RCP I know youve historically been reluctant to provide that information, but just hope we can revisit it because.
I do think it's yeah port and understand the go forward cash earnings power.
Sure so.
Okay.
Yes so.
First of all one question.
Sorry.
I do have a second question Anthony as well okay.
Let me answer the first and then we'll come back to the second.
So first of all the the increase in the cash flow guidance of $300 million.
Is not impacted at all by the decision to keep the RCP business because the operating cash flow guidance for the company as a total company operating cash flow, so really what's driving the $300 million increase in the guidance range from what was 300 to 502 now 600 to 800 million and operating cash flow is strong results on working capital management, which is much stronger than what we anticipated as we've gotten into it and started to drive the strategic actions that I've talked about and better tax planning so.
The guidance.
Increases really based on underlying performance of the of the business.
As the first point secondly.
The decision to keep the RCP business will significantly improve the cash profile of the company as we head into 2020 and so.
The cash because the RCP business is a very strong cash generative generating business and a very strong.
Operating margin business, So I mentioned earlier that.
Keeping the RCP business in the if you do the implied guidance increases the earnings per share from continuing operations in 2019 by almost 40%.
And that flows through to cash flow, so I'm expecting that our 2020 cash flow will be significantly enhanced by the decision to keep the RCP business, it's hard to parse out exactly what the operating cash flow in 2019 is from continuing operations versus discontinued operations.
But now that we've made the decision to keep the RCP business.
I think the discontinued operation impact on operating cash flow for the businesses that are being sold this year is not as significant as what it was planning to be before the decision to sell the RCP business.
Okay. That's great color. Thank you and then the second question was just on the move the headquarter move.
Could you comment at a high level about how many people and what functions.
You have today in new Jersey in other locations that will be.
Impacted and consolidated into Atlanta, and then just.
Just a feel for how confident you are that you can retain key personnel as you make that transition.
Yes so.
The company has about 1100 professional employees in Atlanta today, including most of the corporate employees are already based in Atlanta.
In New Jersey, the company has about one.
Just under a 100 corporate employees that will be affected by the move so theres about a little less than 100 roles that will be moving from new Jersey to Atlanta.
Additionally, in New Jersey, we have about 200 roles in the E Commerce Division and the plan is to keep the e-commerce employees in Hoboken, because we believe this is a good market for E Commerce and digital talent and so really it's less than 100 people that will be moving to Atlanta, or a 100 roles that will be moving to Atlanta, we've gone through a as you might imagine a very.
Specific exercise looking at AD.
The roles that will be impacted the people in the roles and we believe we've got a strong plan to manage the transition without any disruption to the business.
Okay perfect. Thank you.
Your next question is from Priya Ohri Gupta with Barclays.
Okay. Thank you so much for taking the call Chris really appreciate the commentary.
Around your desire to maintain I'd ratings in the focused on debt paydown.
As you've spoken with the rating agencies would you be able to share their perspective on the plan and whether they're on board with.
15 commensurate with the current rating and if they're not how could that potentially affect if at all.
Plans for future debt Paydown and shareholder return.
Sure.
Yes, I mentioned that we've.
I met with both S&P and Moody's last week to take them through the revised plan on keeping the RCP business and the revised projections for the company and effectively.
What we talked about was the strong cash generation that the that we're having in the core business and the fact that we're taking our cash guidance up for the year.
The fact that we're keeping the RCP business, which has a short term.
Increase in the gross debt to EBITDA.
Where I mentioned that we expect to be at or below four times at the end of this year, but were but we believe we've got a plan to be below three and a half by the end of next year and we talked about this the how the company is better positioned and strengthened going forward by keeping the RCP business I'm not going to speak for for where they came out.
But I am expecting.
That both of them will publish.
An update node either today or Monday.
With.
With their conclusion from it but I will say that.
We had very very good meetings in the meetings were very productive.
That's helpful and I guess just one.
Beeping item on the cash flow benefit from better tax planning would you be able to quantify how much of the 300 million increase is contributed to that and whether we should anticipate that is something that gets built into the base going forward or is it a one time benefit. Thank you.
Yes so.
Of the 300 million increase it's about half that is coming from tax planning and about half that is coming from working capital management improvement.
And so one of the things that you will see in our guidance is we've also taken down.
The guidance that we had given previously where we said we expected to pay about 200 million in cash taxes and divestiture related.
Fees this year to a number that's more like $50 million and so that's that's driving about half of the benefit as tax planning and about half is working capital management.
Thank you.
Your next question is from Joe Altobello with Raymond James.
Great. Thanks, good morning.
So I guess first question art.
It looks like that business did about a billion dollars in sales last year.
You raise the sales guidance this year by 900 billion. So I feel that this is 10%.
If that's the case it has two thirds of the business is growing that seems to imply the consumer is declining pretty rapidly. If my math is correct.
Yes. So sales are in that business are not down 10% I think that.
When we did our guidance range.
Yes, we only guide the year to a single decimal point not the two decimal points, though.
Some of that is in the rounding.
So the business is.
Down slightly this year, but as you can see from our core sales growth guidance, we're not changing our core sales growth guidance for the year by including the RCP business. So it's pretty much in line with the balance of the portfolio.
Okay. That's helpful and then.
The third quarter guide core sales trend.
Our implied to get work down to the four versus down one call. It for the second quarter.
The fact that I have been.
Wrapping up so maybe give us a little more color on why you think core sales trends.
Fill rate in the third quarter.
Yes, so I look at it as core sales trends are accelerating in the third quarter and the way I look at it is on a two year stack basis, and if you look at the core sales growth trends on a two year stack basis. The third quarter is improving versus the second quarter by 400 basis points in terms of core sales growth trends.
On a two on a two year stack basis. It's also very much in line with our AD with our plan for the year. So.
The minus two to four that we're planning in Q3.
Fits very well in our in our guidance range, which we're not changing for the year of down low single digits. So I think we're being.
Appropriately prudent in our planning.
But this is very much in line with our plan and we think that.
That it represents a sequential improvement in terms of the underlying performance given the base period dynamics.
Gotcha, Okay. Thank you.
Your next question is from Kevin Grundy with Jefferies.
Hey, good morning, Chris.
Morning, Kevin is that first a housekeeping question then a broader question on the incoming CEO . So the housekeeping question is in the learning and development segment was there any timing benefit with respect to back to school there.
Cycling equally as easy comp I guess, so that looked a lot better and then sort of tying that in with the core sales guidance.
It probably looks a little bit worse than than folks had expected was there any back to school shift there that ended up in Q2 instead of Q3. So thats a housekeeping question then the broader question Chris would just be.
With respect to Ravi coming in how involved if at all were you in the interview process.
What do you think Ravi will bring and why do you think the board believes he is the right leader for the company at this point in time, and then I think what would be helpful. Just maybe to put.
Some context on a timeline for investors.
As he starts in the fall can we expect sort of a long term strategy to be detailed for the company on the fourth quarter call or perhaps down at Cagney in February so any context with those questions would help thank you.
Very good so let me start with a housekeeping question. So.
On the back to school.
Ship in firm on writing, we did ship in slightly better than what we expected in Q2 versus.
When we gave the original guidance for Q2 slightly earlier, but not not significantly and so it wound up being about in line with what we did in the year ago period. So there was not a significant impact of Q2 this year versus last year, but it was a little bit better than we had expected when we entered the second quarter.
As a result of that Theres not really a material difference in Q3. So we I mentioned on the call that we had turned the quarter in four of our seven continuing divisions with baby, writing connected home and home fragrances, all delivering core sales growth in the quarter and I think we feel good about those four businesses continuing on a positive trajectory going forward.
Our.
On the on the housekeeping question.
With regard to Ravi I've I've met Ravi.
And I've talked with them.
A couple of times.
Since since meeting him obviously the decision to hire the CEO was the board's decision.
But I'm very much looking forward to partnering and working with Ravi when he starts in October and in the meantime.
I've talked with with both the board and with Ravi about the five priorities as part of our.
Turnaround plan and the board and Ravi are both.
Very supportive of continuing the effort and moving full speed ahead with our five priority efforts.
Okay very helpful. Thanks, Chris.
Thanks.
Your next question is from Bonnie Herzog with Wells Fargo.
All right. Thank you good morning, Chris.
Hi, Good morning, I wanted to ask you. Good morning, I wanted to ask you about Yankee specifically same store sales trends did and then did the results in home fragrance sequentially improve in Q2 or as you expected.
And then on the store closures how's that been progressing in terms of your expectations and wondering what you're seeing in truck conversion. There and then finally, just love to get your long term outlook for that business and if that's changed at all.
Yep, Okay. So the home fragrance business I feel like we've made an important.
Change in the inflection of that business for the positive and so let me try to provide a little bit about what's happening and what and where were headed in that business. So we continue down the path of.
Closing unprofitable retail stores, so that we right size the retail portfolio and generally we're closing stores as their leases expire we don't expect to fully get out of the retail business, but we expect to downsize the retail footprint over time and you see year to date, we've closed I think 78 stores in the first half of the year.
The.
Comp sales trends at those retail stores.
Continued to decline broadly, but the rate of decline has slowed down because we put a aggressive effort at trying to drive better traffic driving initiatives better conversion.
And.
In an effort at driving.
Increase in average unit retail prices that the retail outlets, that's starting to gain some traction that being said the more important part of the business is what we are doing relative to the to the.
Part of the business that we're selling through retail customers, which is going very well and so.
We've.
Partnered with Walmart and launched the Woodway brand and Walmart.
Our business at Walmart is up strong double digits. The category is growing strong double digits.
The the woodwork brand in Walmart is leading an overall trade up in the category and whats happening is as we've made as we're pivoting to more of a wholesale business.
The wholesale growth is outstripping and outpacing the decline we're seeing in the retail business and the retail business as we're closing the unprofitable stores is becoming a smaller part of the business. So we're very encouraged by the trends, we're seeing and we think.
We see a bright future for that business as we pivot back to.
Offering.
Great products, where the consumer shops. The other important thing in that business is that we've gotten the our European business back to growth and so the European business.
I went through a period, where it needed to reset.
And I think we're on a on a good trajectory in that business driving growth broadly across the international markets.
All right that was helpful and if I may I just wanted to ask about your Nielsen trends, which really appear to have fallen off a cliff in the last couple of months. So I certainly understand that Nielsen doesn't capture big part of your business, but what's going on in these track channels, especially in categories that are weakening like appliances, writing and then sued favorite beverage storage containers. Thanks.
Yes, so Nielsen only covers about 20% for.
Of our business, so 80% of our business is not captured by Nielsen.
And I think what's important to understand about Nielsen is Nielsen Mis is a lot of the parts of our business that are growing disproportionately fast. So I mentioned that we are growing our ecommerce business high single digits in the second quarter and within that we've got some customers that are growing strong double digits that are not picked up by Nielsen. So I think part of what's happening is as the consumer is shifting.
To purchase more online and as we are disproportionately investing in winning customers and winning channels.
I think that the Nielsen results are less predictive of.
The Companys total results than perhaps what they were in the past.
So we certainly look at the Nielsen results.
But.
But I think given that it's only 20% of the business.
We're focused on on the broader part of the business.
That is in the winning customers and channels.
All right. Thank you.
Our next question is from Rick.
Rupesh Parikh with Oppenheimer.
Good morning, and thanks for taking my question. So just given some of the I guess some of the tower news yesterday I'm. Just curious if you have any initial thoughts on the impact of new on whether any of this has been incorporated in your in your thinking for this year.
Yes so.
It's hard it's a little bit hard to react to a tweet.
And we don't know a lot about it yet because the U.S.T. our office hasn't come out.
Unless it's happened while while were on the call here this morning with.
With the specificity and just to give a little bit of color. We don't know is it based on when the products are exported from China or when they are imported from China and that has a difference of about a month in terms of when the effective date goes in we don't know which categories are covered in which categories are not covered and are there any things that are excluded and weve.
Had lots of discussions with Congress about.
Excluding parts of our portfolio from tariffs, particularly the baby products, where it's a child safety issue.
That being said.
Under almost any scenario, we don't see the tariffs is having a material impact to this year's numbers because of the timing of what they would be when they would be put into effect. So even if it was the worst case scenario from a timing standpoint, and it covered all of the company's categories.
And and at the 10% level.
Given the amount of inventory we have in the us.
And.
The.
Focus we've got on mitigating actions, including asking suppliers to help cover some of the cost and taking pricing. We don't believe its a material impact to the company this year.
Okay, Great and then I mean, if if it does go into effect.
Any sense in terms of how to think about the exposure next or I don't know if there's any color you can provide in terms of your current exposure.
Yes, I think it's I think it's premature to do that just because we.
Given the amount of uncertainty with which categories that would cover what the amounts are.
How it would be implemented.
I think it's premature so we certainly we'll we'll provide that as the as the rules get get clearer.
We also are starting our budgeting process.
Shortly here in the next month or so for the planning process for next year and so.
Anything that gets put into place we would incorporate into that into that planning process, but it's premature to speculate on the impact for next year and going forward.
Okay and my last question on tower, So I know you've taken some actions on pricing a year to date. So just curious how those options I played out versus your expectations.
Yes, so generally pretty well so you can see from the results in the second quarter that pricing and productivity.
More than offset the impact of.
Of tariffs inflation, and FX and allowed us to grow our our gross margin by 50 basis points versus year ago.
The most recent set of tariffs that went into effect in May took the list three product tariffs from 10% to 25%.
We've taken pricing actions now across all of the businesses that were affected.
From that and generally the discussions with the retailers have gone well in terms of getting price acceptance from the retailers.
It's a little bit premature to say what the consumer reaction is because many of those price increases didn't go into effect until the end of the second quarter.
But what we are seeing is generally where were impacted by pricing its not in every case, but in most cases, our competitors were also impacted by the tariffs and so there is a desire for the industry to price recover.
For that so it doesnt create a.
Competitive advantage or disadvantage for anybody.
Over the over the medium term.
Great. Thank you for all the color.
And we have time for one last question, which will be from Olivia Tong with bank of America.
Great. Thank you.
I wanted to talk a little bit more about margins you you explain the DNA with all the incremental advertising, but gross margin was a big swing negative to positive. This quarter can you unpack that a little bit and.
Any sort of give a little bit of color into what the second half looks like on gross margin. Thank you.
Yes so.
Under on gross margin, we've put a a very concerted effort in improving our gross margins and the things that were that were working on are reducing the company's SKU count we've now reduced.
When I when I presented at Cagney I said that at the beginning of the year. We had 90000 skews in the continuing operations business. We've what we've already taken 12000 skews out and we're down to 78000 and so we've made a.
A big improvement there. We also have announced that we're closing three manufacturing plants and 10 distribution centers and so we're starting to make effort.
Progress on our consolidation of our supply chain footprint and we're focused on gross productivity and the productivity work that the company has done.
And is doing is really starting to pay dividends and so if you look at productivity as a percent of our cost of goods sold the productivity results. This year I expect will be the best of the companies had.
In recent history, and if you look at the productivity funnel this year versus at this point for next year versus where we were last year at this time, our productivity funnel for next year is up 33% versus where our productivity funnel was last year at this time for this year. So I think we're making very strong progress there I think that the underlying operating progress that we're making on driving gross margin higher as being somewhat masked by the impact of foreign exchange and tariffs and.
Commodity inflation.
And that that those impacts will be variable by quarter, but the the the trajectory on the underlying operating progress on gross margin is very strong and I expect that to continue.
Got it.
On the portfolio decisions that you've made were to just look at our main commercial or did you have a look at the rest of your business all the entire portfolio and I realize it's not just one persons decision and that new CEO coming but.
As you think about the portfolio going forward, what's the potential for even more change or greater assessment relative to what you've already done.
Yes, I think that.
I did look at the whole portfolio.
And I think that.
We expect to complete the ATP plan with the remaining three divestitures, the USBC, which we've already signed a deal that we expect to close mapa spawn tax and quickie or the two remaining businesses.
To be sold.
And once we do that I don't anticipate that we're going to have another big program like an ATP type effort that being said.
We're always going to evaluate the portfolio for.
Improvement opportunities and that could both be.
As divestiture related or it could be tuck in acquisition related but I don't think you'll see us do.
A major effort like the ATP plan anytime in the foreseeable future.
Great. Thank you so much.
Okay. This concludes our question and answer session I will now turn the call back to Mr. Peterson for closing remarks.
Thank you.
I would like to thank everybody for participating in today's call and for your interest in Newell brands I also want to commend all my new colleagues for executing well through a time of uncertainty and transition while it's still early days in the company's transformation. There is lots to be proud of and a much more compelling future ahead of us. Thank you and we hope you enjoy the rest of your day.
A replay of today's call will be available later today on our website Newell brands Dot com.
This concludes our conference and you may now disconnect.