Newell Brands Inc.
Q2 2021 Earnings Call Transcript

Published: 30 Jul 2021

[Operator:]

Good morning and welcome to the Newell Brands second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will then open up the call for questions. In order to stay within the time scheduled for this call, please limit yourself to one question during the Q&A session. As a reminder, today's conference is being recorded. A live webcast of this call is available at ir.newellbrands.com. I will now turn the call over to Sofya Tsinis, VP of Investor Relations. Ms. Tsinis, you may begin.

[Sofya Tsinis:]

Thank you. Good morning everyone. Welcome to Newell Brands second quarter earnings call. On the call with me today are Ravi Saligram, our President and CEO and Chris Peterson, our CFO and President, Business Operations. Before we begin, I would like to inform you that during the course of today's call, we will be making forward-looking statements which involve risks and uncertainties. Actual results and outcomes may differ materially and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K and other SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as in other materials at Newell's Investor Relations website. Thank you. And now, I will turn the call over to Ravi.

[Ravi Saligram:]

Thank you Sofya. Good morning everybody and welcome to our call. I am pleased to announce another outstanding quarter for Newell as we further built on the strong momentum in the past three quarters. We delivered 25% core sales growth, 59% normalized operating income growth and 87% normalized EPS growth in the quarter versus prior year. We have now delivered four consecutive quarters of core sales growth and experienced five consecutive quarters of domestic consumption growth. Based on first half of 2021 sales momentum, we are raising our topline outlook for the year. During the second quarter, core sales growth exceeded 25% as we lapped significant disruption from the pandemic. Informally, even on a two-year stacked basis, core sales grew low double digits, both in the second quarter and during the first half showing the underlying momentum in the business. I am especially pleased that once again we saw broad based topline strain across each approx eight business units and across major channels with every region growing at double digit rate. While performance in North America was excellent as core sales grew almost 22%, international markets once again shone registering nearly 35% core growth in the second quarter and almost 31% in the first half with particular strength in Latin America. Seven of our top 10 beloved brands including Coleman, Graco, Oster, Sharpie, Yankee Candle, Paper Mate and First Alert grew at a strong double digit pace. Yankee Candle stood out as its sales nearly doubled versus last year. We delivered strong topline results even in businesses such as food and home appliances that face tough comparisons versus prior year as a result of demand spikes.

[Chris Peterson:]

Thanks Ravi and good morning everyone. Second quarter results were outstanding as the integrated set of strategies we put in place several years ago continued to drive strong financial results across all key metrics. Before getting into the details, I want to provide a little color on the current operating environment and proactive choices we are making. We delivered better than anticipated results in Q2 as consumer demand across our categories remained robust and our supply chain teams did a heroic job navigating a choppy operating environment. To give a little perspective on the supply environment, we continue to face a number of externally driven supply challenges. As a reminder, in the second quarter of 2020, our supply chain was significantly pressured as a result of government-mandated closures across many of our facilities due to the pandemic. That was a low point for the business and we are in a much better position today with our factories, distribution centers and retail stores open. More recently, however, our teams have worked tirelessly to overcome various supply challenges surrounding longer lead times for sourced products, trucking capacity in the U.S. as well as labor shortages, raw material and component availability. COVID-related disruptions across ports as well as consumer demand spikes following stimulus payments have exacerbated these issues. Early on, we took a number of proactive actions to mitigate the impact from these dynamics, including building inventory on top-selling SKUs, allowing for longer in-transit times as part of our planning process, accelerating the pace of automation where feasible and being creative with increased incentives to attract and retain employees in factories by raising wages, further enhancing benefits and working conditions and providing employee development programs among other actions. The complexity reduction work that we executed as part of the turnaround has put us in a much better position to deal with these challenges. While we have successfully navigated these dynamics and created more agility within our supply chain, it certainly has not been easy and the challenges are ongoing. The other changing dynamic has been inflationary pressure. We have seen continued escalation inflation, largely driven by increasing resin prices, ocean freight costs, source finished goods pricing due to a strengthening Chinese Yuan and labor wage pressure. These factors are not unique to Newell and are affecting everyone in our industry. To put it in perspective, we currently expect inflation to amount to nearly $560 million in 2021. This is about $200 million worse than what we expected just three months ago and $350 million worse than we expected at the beginning of the year. We are taking a number of actions to mitigate this significant inflation spike, including a more aggressive push on productivity savings, continuing to tightly manage costs, optimizing promotional spend, driving operating leverage from stronger topline growth and taking additional selective pricing later this year in categories where we are seeing the greatest impact. The net result is that we are maintaining our EPS outlook for the year, which calls for strong operating profit growth despite the significant increase in inflationary pressure. In the U.S., we have now announced price increases across seven of our eight business units. These pricing actions do not fully offset the inflationary cost pressure as we are using productivity savings and operating leverage as offsets as well. As we start to think about 2022, we expect this headwind to become a tailwind. As inflation is largely in the base, we benefit from carryover pricing and we continue to drive productivity savings and manage costs tightly. Moving on to second quarter performance. We delivered very strong results as demand exceeded our expectations. This yielded a better than anticipated outcome on topline that also flowed through to the bottomline. The company's net sales increased 28.3% year-over-year to $2.7 billion. Core sales grew 25.4% as we lapped a 12.6% decline from a year ago. Favorable foreign exchange more than offset the headwind from business and Yankee Candle retail store exits. We saw broad-based strength during the quarter, with each of our eight business units in all four geographic regions growing. Core sales in the first half of the year grew 23.3%. On a two-year stack basis, which helps smooth out the noise from the year ago figures, we grew core sales in the low double digits, both during the quarter and in the first half. Normalized gross margin expanded to 32.7% from 31.6% in the year ago period. The benefit from FUEL productivity savings, favorable business mix and pricing more than offset a more than 700 basis point headwind from inflation, primarily related to resin-sourced finished goods transportation and labor costs. Normalized operating margin expanded 240 basis points year-over-year to 12.6%. Gross margin improvement in combination with sales leverage and disciplined overhead cost controls more than offset the impact of an increase in advertising and promotion expense. Normalized operating profit grew 59% year-over-year to $341 million. Net interest expense decreased by $6 million year-over-year to $65 million, reflecting about a $700 million year-over-year reduction in outstanding debt. The normalized tax rate was 15.2%, above the year ago level of 11.2% due to a higher rate impact last year from discrete tax items. Second quarter normalized diluted earnings per share were $0.56, nearly doubling year-over-year. Now turning to our segment performance. Core sales for the commercial solutions segment increased 16.6%, with strong growth in both the commercial and connected home and security business units. Core sales for home appliances increased 15.3%, primarily driven by Latin America. The home solutions segment increased core sales 33.7% with double digit growth in both the food and home fragrance businesses. Core sales for the learning and development segment increased 31.6%, which reflected similar level of strong growth in both the writing and baby business units. Lastly, the outdoor and rec segment increased core sales 25.0%. Given the meaningful business disruption from the pandemic in the second quarter of 2020, we think it is informative to compare the company's current results to the second quarter of 2019. Newell's net sales exceeded the 2019 level by 9.2% as results were higher across every segment other than learning and development which was only slightly lower. Year-to-date, through Q2, Newell generated operating cash flow of $76 million as compared to $132 million a year ago. While operating income increased substantially versus last year, that was more than offset by a temporary increase in working capital to support strong demand in 2021 and manage through longer lead times. We continued to accelerate our cash conversion cycle in the second quarter, which improved by about 14 days versus the year ago period. We ended Q2 with a leverage ratio of 3.1 times, a meaningful improvement from 4.6 times a year ago and very close to our target of three times. The year-over-year step-down in Newell's leverage was driven by a combination of a net debt reduction of over $700 million as well as an almost 30% increase in trailing 12-months normalized EBITDA. We have over $2 billion in available short term liquidity, including $637 million of cash on hand, which is a very strong position. Before sharing our outlook for the third quarter and full year, let me walk you through our underlying assumptions as they have changed relative to late April. The macros in the U.S. are generally healthy and the consumer is still flushed with cash as a result of the stimulus benefits as well as the enhanced Child Tax Credit more recently. However, with the surge in the Delta variant across various geographies, uncertainty around the pandemic remains. Our outlook for the remainder of 2021 includes a much higher than previously contemplated forecast on topline growth, a significant year-over-year increase in advertising spending, substantial escalation and inflationary pressures with some offset from pricing and continued traction on productivity, previously discussed supply chain constraints as well as much more difficult comparisons as we lap a 6% core sales growth comparison from the back half of 2020. We are still forecasting a much stronger first half relative to the second half of 2021. Our upwardly revised topline forecast for the full year 2021 implies that core sales will increase versus 2020 and 2019 in the third quarter as well as for the full year and will be up versus 2019 in the back half. Let's discuss the full year outlook in detail. Our revised net sales guidance for 2021 is $10.1 billion to $10.35 billion, an increase from $9.9 billion to $10.1 billion previously, which implies 8% to 10% year-over-year growth. We now forecast core sales growth of 7% to 10%, which compares favorably to our previous outlook of 5% to 7%, reflecting better than anticipated results in Q2 as well as an improved outlook for the balance of the year. Currency is still expected to be a tailwind to topline, helping to more than offset the year-over-year headwind from closure of Yankee Candle retail stores and other minor business exits. We now expect a flattish normalized operating margin in 2021, around 11.1%. Our forecast implies that normalized operating profit increases in the high single digit to low double digit range, which would be a great outcome given the magnitude of inflationary pressure we are absorbing. We continue to plan for higher advertising expense versus 2020 to support new product launches and omnichannel investments. Our outlook continues to assume a high teens normalized effective tax rate and a modest uptick in shares outstanding. We are maintaining our normalized earnings per share forecast at $1.63 to $1.73. Our operating cash flow guidance for full year 2021 also remains the same at approximately $1 billion, driven by improvement in the company's cash conversion cycle. For the third quarter, we are forecasting net sales of $2.7 billion to $2.78 billion with core sales flat to up 3%. We expect Q3 to be the peak quarter for inflation pressure which will significantly weigh on the company's margin performance. We are forecasting normalized operating margin of 10.3% to 10.8% as compared to 14.9% in the year ago period as inflation and a meaningful increase in advertising and promotion spending will more than offset the benefit from volume leverage, productivity and pricing. We expect to realize discrete tax benefits in Q3 so that the normalized effective tax rate will be in the mid single digit range. This translates into normalized earnings per share in the $0.46 to $0.50 range. We have made tremendous progress on our turnaround as demonstrated by our strong financial results. As we look forward, we are pivoting from complexity reduction to driving operational excellence in everything we do. We remain laser-focused on executing our strategy which, we believe, shows a clear path to creating long term shareholder value. Operator, let's now open the call for questions and answers.

[Operator:]

. Our first question comes from Lauren Lieberman with Barclays.

[Lauren Lieberman:]

Thank you. Good morning. So first off, I mean, the proactive decisions that you all made with regard to supply chain are just remarkable and the resilience of the business that you were able to exhibit this quarter and your plans for the full year. But since you brought up 2022 and some of the cost headwinds, net of pricing, becoming tailwinds, I wanted to also ask about topline in 2022, not for guidance, not for numbers, but just how you are thinking about some of these very tough comparisons you have versus a very strong and healthy consumer environment with people, as you said, investing in home-as-the-hub? So as you look forward, any help you could offer on how we should think about topline development? Plans that you have, whether it's for innovation or to continue to stimulate category growth, I think, would be helpful? Thanks.

[Ravi Saligram:]

Thank you Lauren. Let me start off. Clearly, it's a bit premature to offer a perspective on guidance and I know you are not looking for that. Nevertheless, it's still difficult because we are now coming sort of out of the pandemic, but the Delta variant is sort of lurking around and so the second half will be an important determinant. Having said that, I think as I said in my prepared remarks, the company is in far better shape than we have been in many years. Our brands are much stronger. We have put a lot of focus on innovation. Our writing category is very strong. In fact, I would say all our businesses now are in pretty good shape. Remember, we just talked, I think, a year ago where I had big questions about home appliances and outdoor. And I am really feeling very good about what the home appliances team has done. Their real strength is in international, particularly in Latin America. If you look at this quarter, the fact that it was up so high. So we should look at Newell not just as a U.S. business but as a global business given a third of our business or so is international. And we are now going to put a lot more focus on international as well. And just you have seen how we are growing. So I would say, long term, we are still committed to having modest topline core sales growth. I can't give you a view on 2022 in particular. But I think the key is and there's the whole issue about the portfolio, right, where if we have very strong growth in one and some other business is not doing as well, you leverage, like I said, hey, this year, writing and home fragrance. But I think the good news is, I am now seeing innovation across all our businesses. The little baby uptick was encouraging. The thing I know you are always interested in the old baby business. And not only the innovations, but just to see that there is a slightest hope on birth rates going up and then the zero to four remains constant. So when I look at all of that. It's tough to give a sense. But look, we are very committed to being a growth company. And that is probably the best I can do for you versus giving numbers. I would hate for people to just think all the bumps we have had are just due to COVID. I really want us to show that we are a sustainable and profitable growth company.

[Lauren Lieberman:]

Okay. That's really helpful. Thanks so much.

[Operator:]

We will take our next question from Kevin Grundy with Jefferies.

[Kevin Grundy:]

Hi. Good morning everyone. Question for Chris, just on the guidance. And not to be too near term with this, but I think some of the concern of maybe what's hitting your stock a bit is what's implied for the fourth quarter. When we look at the strong Q2, what you are guiding to in 3Q and then what you have for the full year, it implies that the fourth quarter will be down mid single digits. And I understand the comp is more difficult than what you have had in the past couple of quarters, it still implies that the two-year stack or two-year average decelerates a bit. Chris, maybe just provide a little bit of color on that? And then I have a broader follow-up. Thanks.

[Chris Peterson:]

Sure. So let me address that straight away. So as I mentioned in the prepared remarks, we are in a more uncertain situation because of the Delta variant. So we have chosen to provide a wider guidance range on topline than we normally would. We did not guide for Q4. Specifically, we guided for Q3 and for the full year. And obviously, you can do the math to get through the implication. But we are very much thinking about our guidance as a prudent guidance range. And we are shooting for the higher end of our guidance range. But given the external dynamics and the uncertainty, we felt like it was prudent to maintain a wide range in this environment.

[Ravi Saligram:]

Chris, may I add something there? There are a couple of things recognized in Q4 last year, we had Amazon's Prime Day. That got shifted to Q2. So there's a little bit of that shift. But right now, our visibility is closer to Q3. And that's why we felt confident and that's what you should really look at is that we have, even for Q3, despite the very strong comp last year, the fact that we have guided for growth and as Chris said, we are hoping to be on the higher side as opposed to the lower side. And look, even when we look at consumption, I mentioned that Q2, we saw healthy consumption growth where we have just had the July numbers and we will continue to see consumption growth. So I am optimistic. I think it's tough for us to give a real handle on Q4. So we are just taking the prudent steps. So I would not look at sort of Q4 arithmetic and say, wow, there is some huge trend change going on.

[Kevin Grundy:]

Got it. That's helpful. Thank you both. And then just a quick follow-up on the pricing front. Maybe just remind us what portion of the portfolio you have taken pricing on and the potential to take additional pricing in the remainder of the portfolio. And I guess as it pertains to latter, understand there needs to be a cost justification, but it is sort of hard to envision many categories where there's not a cost justification. Maybe you can just comment on that? And then I will pass it on. Thank you.

[Chris Peterson:]

Yes. So we have taken pricing in seven of our eight business units. We are broadly pricing about over 80% of our portfolio we are taking pricing on. And what I will say is that the pricing is not a single event because of the escalation of inflation. As I mentioned, when we started the year, we thought that inflation was going to be a $210 million headwind. At the end of the first quarter, we thought it was going to be $360 million. And now we are forecasting $560 million. And so we have taken sort of around the pricing that went into effect that in late June, early July, we have announced or are announcing pricing, additional pricing that's going into effect in the fourth quarter, in October, November. And the combination of that, I think, is not fully pricing for inflation because we are also using productivity and operating leverage and cost controls to offset. But we are pricing for a significant part of inflation, which we think is prudent. And so far, our discussions with the retailers have gone reasonably well. But we are managing it day-in and day-out.

[Kevin Grundy:]

Okay. Thank you both. Good luck.

[Operator:]

Our next question comes from Wendy Nicholson with Citi.

[Wendy Nicholson:]

Hi. Good morning. My first question, I guess I have two, but they are interrelated. So first question is on category growth. And obviously, I think, Ravi, you called out some of the great growth in the outdoor segment and how some of that, I think, is being fueled by obviously changed consumer behavior but also incentives and whatnot. But I am wondering if you were getting any sense from your retail customers that, wow, everybody who wanted a new Coleman chair or Coleman cooler already has it? And so is there any sign of slowing demand in that channel? Even if your market shares are good, I am just interested in category growth, if you will. And then second, I guess, maybe for you, Chris, on the pricing front. Some of your categories, - I mean my jaw dropped when you said you gained, I think, 700 points of share in gel pens. I mean that's awesome. But I assume competition is going to react to that. So as you put through that pricing, can you talk about kind of what you are modeling or expecting or starting to see from a competitive perspective, maybe as some folks react to your share gains? Thanks.

[Ravi Saligram:]

So let me start with the consumption trends and then Chris can address on the pricing. So look, we are seeing category growth in many of our businesses. So you are seeing really, like baby is a good example where you are seeing double digit category growth. But having said that, we are doing even better and that's why gaining share because the strength of the Graco brand and all the innovations that we are launching. And I think one of the factors, because we always go to what is the underlying reason, you are seeing a lot more, I think people were cooped up last year, start getting vaccinated, feeling bolder to start driving into overnight trips, therefore buying car seats. This whole grandparents effect, where people are trying to, sometimes they have been at COVID together. So they are buying car seats. So I think you are seeing the category is going up and the stimulus certainly helped. And with the stimulus, there has been a tendency to go to some of the premium brands and the leaders. And Graco has really benefited. So that's a great example of that. And specifically on outdoor, we are doing a lot of great work. And I think we are seeing the benefits of that even more this year because Coleman was in a turnaround. I think the team has done a great job on soft coolers, for instance. They have come out with some nice steel-belted coolers. The whole dome tents that they have come out with, the OneSource. There have been a lot of innovations that have helped. And if we look at category-by-category, we have certainly done well. The thing that has really been a tough problem for us on the Coleman brand has been keeping pace with demand. We have been chasing demand because we get a lot of stuff from Asia. And so this is one where we have had a real tough time keeping pace. So the demand is certainly there. And so when we think about the second half, too, the supply thing is more in our minds rather than any worries about our brands at all. Now some of the consumption on like food and appliances in the U.S., there was some slowdown because last year they were up so much. But then the good news is, look, food, every one of our brands we are gaining share. That just goes to the power of the strength of our brands and what our teams are doing and the innovations. Chris, over to you.

[Chris Peterson:]

And on the pricing side, we have done a tremendous amount of work looking at elasticity models for pricing, looking at the specific cost inflation. And the thing that's important here, I think, is that the cost inflation that we are facing is not unique to us. It's something that the entire industry is facing. And we are not fully pricing to recover, because we are using the ramp-up that we have in productivity savings, we are going to generate productivity savings this year of 3.5% to 4% of cost of goods, which is a very strong result on top of what we did last year and that's helping to partially mitigate. And so as we take the pricing, generally what we are hearing and we are monitoring it day-by-day, is that the whole industry is moving prices up. Now in any particular category, there could be a competitor that tries to lag us or maybe they price ahead of us. And so that's what we are monitoring sort of on a day-to-day to make sure that we don't wind up with a sustainable price gap. But our strategy is not to gain market share by undercutting people on price. Our strategy is to gain market share by coming out with very strong product innovation that offers a superior consumer value. And that's when you hear us talk about market share gains, it's not because we are trying to undercut anybody on price. It's because we are driving innovation that's compelling for the consumer and for the retailer.

[Wendy Nicholson:]

Fair enough. Makes great sense. Thank you.

[Operator:]

We will take our next question from Bill Chappell with Truist Securities.

[Bill Chappell:]

Thanks. Good morning.

[Wendy Nicholson:]

Good morning Bill

[Bill Chappell:]

I just wanted to dig a little bit deeper on writing and development, especially as we kind of go into the key third quarter. In the release, you said, obviously consumption or sales were still below 2019 levels and that makes sense. April, May, most of us and even June, July, still working from home. But I mean it seems like most businesses are kind of targeting a post-Labor Day return, the Delta variant aside. Schools here in Georgia and elsewhere, I mean, start in the next few weeks. So trying to understand, is there a pent-up, two questions there. One, do you think there's pent-up demand just from the past 12, 18 months where you could be well above 2019 levels, especially on the office side? Schools seem like they would just kind of return to normal. And then two, everything we hear throughout the industry is supply shortages and supply chain constraints. Do you have the bandwidth or the supply available to meet that need, if there is that kind of surge? Or could there be out of stocks or issues where you can't capture the full demand over these next three, four months?

[Ravi Saligram:]

So Bill, good morning. I will take the first one and then have Chris deal with the second. Look, our fervent wish is to try and get back to 2019 levels on writing. And the team is really focused on that. Having said that, you pointed out the whole, there is the office component of this. Now despite the fact that you are hearing all the stuff on the media on people going back to September, but the Delta variant is also creating, already, you have seen some companies announce shifts to October. We went to NPD and looked at the survey. They had done a very good quantitative one where we saw, I think they are forecasting that at least a third of people will continue to be hybrid for a while. So that does have an impact. Having said that, it's still early days because look, the back-to-school season has just taken off and we are still going into the height of it. And the fact that, as we said on writing, the core sales exceeded the company's average of 25%. It gives us great and look, while it was below 219, it's just a little, we feel pretty good about the trends. Consumption is also up. And then our market share is up, overall writing, not just gel pens. So when I look at all of that, I feel very bullish about writing. And the last thing that you mentioned, which we have seen through the studies, there are a lot of schools that have advanced by, say, five days to seven. So that's a positive thing. And then colleges, it's sort of there's two freshman class that's coming in. So I think we feel pretty good about what's happening on this business. And believe me, that team is very focused because they want to show that this is a top-notch business.

[Chris Peterson:]

On the supply chain, we are very well positioned on the writing business. The vast majority of what we sell in writing is manufactured in the U.S. So we are not in this business dealing with ocean freight, port issues, availability of raw materials and components as we are on some of our other businesses. And so we believe we are well positioned to respond and capitalize the upside. The other thing I would point out is that is a positive is, some of our competitors in writing are not as well-positioned where they are not manufacturing in the U.S. And they are suffering from some supply issues. And so supply could turn out to be a real benefit for us on the writing business versus at least one of our major competitors.

[Bill Chappell:]

Got it. That's helpful. And just a follow-up. A couple of years ago, the plan, in part, was divest some businesses, use the cash, do major share repurchase. And that obviously changed, I think for the better and holding on to some assets and not really doing a whole lot in share repurchase. But now, I mean, hard to believe you are getting to the almost underlevered compared to your peer group. And I know the biggest cash flow generating quarters are in the next two. So is there a thought from you or the Board of rethinking about stepping up share repurchase as we move into this kind of cash flow period?

[Chris Peterson:]

Yes. I think as we think about capital allocation, the way we are thinking about it remains the same, which is we expect, number one, to continue to drive very strong operating cash flow. Our first priority is to reinvest back in the business and we are looking for very strong return projects to do that that are well above our cost of capital. We plan to maintain our current dividend. We are getting close to the leverage target that we set of 3.0 times or 3.1. And I think beyond that, we will start to look at things like share repurchase as well as tuck-in acquisitions to the extent that we think they can be significant value accretive to the company. And so we are excited to get to our target on the balance sheet and we think that does open more flexibility as we go into the next few years.

[Ravi Saligram:]

And Bill, one thing you have mentioned, dispositions. Look, I think one of the things, I think we have good connections now. We have a good portfolio and I think we are getting more and more skilled at leveraging different aspects. And we actually feel, hey, maybe it's too premature to declare that the turnaround is over. But we certainly are thinking about what we want to be when we grow up and starting to think about our long term plans and really assigning roles for each businesses. So I think the decisions we have made on keeping the businesses we have is a good one. And now it is a question of taking each one of these businesses to their full potential, whatever that role might be.

[Bill Chappell:]

Great. Thanks so much.

[Operator:]

Our next question will be taken from Olivia Tong with Raymond James.

[Olivia Tong:]

Great. Thank you. Good afternoon. I wanted to talk first about your level of visibility on getting to your topline targets given obviously the supply chain challenges. Because obviously, we are not just talking of consumer demand but also the increased difficulty in satisfying that demand because of the externals. You sort of touched on this with respect to writing but kind of curious on the rest of your key businesses, where you stand with respect to that? And I would imagine with respect to supply chain, that two things. One, sort of major categories, what your competition looks like? Again, you talked about that with writing but kind of curious on the other categories. And then also what you are seeing from them with respect to pricing? Is the magnitude similar? Is the timing similar? And if not, where do they differ? Thank you.

[Chris Peterson:]

Yes. So on the supply chain, as I mentioned in my prepared remarks, it is a challenging external environment and the challenges are largely due to ocean freight availability of containers, length of time it takes containerships to move from Asia to the U.S., trucking capacity in the U.S., labor availability in the U.S., some raw material and component availability depending on the business unit. And then you couple that with the consumer demand spike that we are trying to navigate and meet. I think that our teams have done a really a heroic job of meeting and navigating through this environment. But our guidance does contemplate that this environment remains difficult for the remainder of the year. So we are not expecting an improvement in the external environment but we do expect us to continue to navigate it. I think the good news is that this is not an environment that's unique to Newell. This is an environment that all of our competitors face. I mentioned on writing that I think we are better positioned than at least one of our major competitors. The balance of our categories, I think we are largely similarly positioned. And so we don't see major gaps in our external pressure versus our direct competitors' external pressure on the whole. So that's how I would characterize the supply chain. And I think part of the reason why we have given a wide guidance range is recognizing the variability and the uncertainty of that supply environment, including the ramp-up of the Delta variant, which can have an impact on that. As I said, we are shooting more for the top half of our guidance range. But we think it's prudent to maintain the guidance range given the variability in the external environment.

[Ravi Saligram:]

Yes. I think one thing to add is, overall more than a third of our products are sourced from Asia and that's why we do have some effects. I mean the external effect is really the bigger issue, as Chris pointed out. And so yes, it's going to remain a bit of a challenge.

[Chris Peterson:]

And your question on pricing, I think it's different because we compete against many different competitors. It's different by category in terms of what we are seeing. But broadly, we are seeing the industry take prices up because the inflation environment is affecting everybody. And again, it's not unique to us. There can be timing differences in any particular category with a particular competitor and we are navigating that, I think, reasonably well and closely monitoring it as we go forward here.

[Olivia Tong:]

Got it. And then just one follow-up on margins. Can you just give us a sense of sort of order of magnitude with respect to the increase in costs? Raw material cost inflation that sticks around for a while versus some of the supply chain disruption that hopefully is relatively transitory. Maybe if you could just break that down to the quarter and then the full year? And how you think about the contribution from improving mixes and offset in addition to obviously the productivity things that you talked about? Thank you so much.

[Chris Peterson:]

Yes. So I think on the inflation side, there are really four factors that are driving inflation

[Olivia Tong:]

Thanks so much. Really appreciate it.

[Operator:]

We will take the next question from Peter Grom with UBS.

[Peter Grom:]

Hi. Good morning or I guess good afternoon at this point. So I just wanted to ask around the kind of Q3 margin ratio, maybe just to follow-up to Olivia's question. I mean what does the guidance embeds from a segment mix perspective? You have been pretty open about the mix tailwinds from a normal writing year. So any commentary there would be really helpful. And then just the advertising commentary. Chris, you mentioned up significantly. Is that just a significant change versus what you were embedding in after Q1? Or is that just kind of a broader comment around year-over-year? And then is there just any way to think about or quantify the magnitude for advertising, the advertising embedded in your Q3 guidance? Thanks.

[Chris Peterson:]

Yes. So on the Q3 guidance, I will try to tackle them. So if you recall last year at this time, we were coming out of our supply chain being shut down. And so our A&P that was in the third quarter last year was artificially low. This year, we are in a much better supply situation than we were last year. And so we have basically reinstated A&P. We also have much stronger innovation in the market this year. And so advertising costs are up significantly this year versus last year, both in dollar terms and in percentage terms. On the inflation front, in Q3, as I mentioned, we do expect inflation to be peaking in Q3 of this year. of our $560 million, the biggest impact is to the third quarter on inflation and that is a fairly dramatic impact. We are mitigating that to a significant extent through productivity actions and through cost containment and some volume leverage. But that's what's driving and embedded in the Q3 sort of margin guidance.

[Peter Grom:]

Okay. Great. Thank you.

[Ravi Saligram:]

Thank you very much. I think, we apologize to others who we couldn't get to. But it's a wrap. And thank you very much, indeed.

[Operator:]

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