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Newell Brands Inc. (NASDAQ:NWL)
Q2 2019 Earnings Call
Aug 2, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen good morning and welcome to Newell Brands Second Quarter 2019 Earnings Conference Call. [Operator Instructions] 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&A section. [Operator Instructions].A live webcast of this call is available at newellbrands.com on the Investor Relations homepage, 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.

Nancy O'Donnell -- Senior Vice President of Investor Relations

Thank you. Good morning and welcome to Newell Brands 2019 Second Quarter Conference Call. Chris Peterson our Interim CEO and CFO will 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 the 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.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

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 are ahead of plan on operating margins, driven by better-than-expected gross margins and lower overhead costs. Productivity and cost controls are taking firm hold and tracking ahead of schedule. Normalized earnings per share benefited from pricing, productivity and mix, in addition to disciplined cost management. Operating cash flow improved 180 million dollars 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 turn-a-round plan. Over the last few months we've developed a bold and aggressive turn-a-round 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, focus profitable growth we are starting to 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 we're 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 in 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, we've now created a Social and Influencer Marketing Playbook and increased influencer marketing spend 4x versus 2018 with 30 Influencer 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 12,000 SKU's 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 SKU reduction efforts. Over the past several months, we've successfully implemented three SAP conversions, the US -- the US Fresh Preserving business, The Coleman business in Australia and New Zealand and the Appliance and Cookware business in EMEA. We have another SAP conversion scheduled to go live and appliance and cookware in 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 on two ERP systems. We continue to make progress on reducing systems complexity and standardizing systems across the organization. We are on track to cut IT business applications by 85% by the end of next year, as we remove redundancy, simplify the IT footprint, and reduce cost. We also implemented a new E-commerce 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've 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 company's 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 is 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 represents roughly one-third of the company's 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 Rexair transactions in the second quarter and entered into a definitive agreement to sell the US Playing Cards, the Cartamundi 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 in Newell's 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 Spontex and Quickie and we expect to be in the 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 million and $775 million and after-tax proceeds.

All divestiture proceeds generated in 2019 will be directed toward debt paydown, 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 reach 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. In our view, with the RCP 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, webcast and video communications and through our employee app. As a result of these efforts and of the excitement generated by early signs of the turn-around 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 too, but this type of progress is encouraging.

On this engagement front, we made a strategic announcement this morning that 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 11 hundred[Phonetic] 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 closer physical proximity will promote better teamwork 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 and 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 & 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 in 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 and normalized operating margin to 11.3% which was ahead of our plan. We are moving quickly to drive the turn-around of Newell Brands and optimize the cost structure with progress evident in the first half results and additional work streams under way. 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 discont[Technical Issues] [Technical Issues] operations was $69 million below $282 million in the year-ago quarter, reflecting loss contribution from seven completed divestitures, which include the Waddington, Rawlings, Goody, Pure Fishing, Jostens, Process Solutions and Rexair businesses. At the end of Q2 we had 424 million diluted shares. The company delivered normalized diluted earnings per share of $0.45 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 $0.29.

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[Phonetic] the disruption stemming from the TRU bankruptcy. The team has reenergized and focused on sustaining this momentum with exciting new product launches hitting the shelves, including a full relaunch of the iconic Baby Jogger City Mini platform. The writing division maintained its core sales growth momentum. Our back-to-school selling shift 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 impacted by the shift of orders on the fresh preserving business into the first quarter, ahead of the April 1st implementation of SAP. 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 WoodWick across a number of retailers. The Connected Home & Security Division maintained its growth momentum. Core sales for the Outdoor and Rec. 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, 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 basins[Phonetic] or $0.06 per share. The move has no impact on operating cash flow. Our updated outlook for Q3 and full-year 2019 will be based on the 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 non-cash 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 to $9.3 billion, 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 A&P 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 pre-tax income guidance on the underlying business by about $35 million to offset the incremental non-cash 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 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 core order we currently expect net sales in the $2.42 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 100 to 130 basis point year-over-year decline and normalized operating margin to 11.9% to 12.2% as a significant ramp-up and A&P spending in Q3 were 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 $0.55 to $0.60 range with the diluted share count 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 will 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 and foreign exchange and simultaneously continuing to support the company's brands and innovation in the marketplace. We are also taking concerted 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 Q&A .

Questions and Answers:

Operator

Thank you [Operator Instructions] . And your first question comes from Bill Chappell with SunTrust.

Bill Chappell -- SunTrust -- Analyst

Thanks, good morning.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Good morning, Bill.

Bill Chappell -- SunTrust -- Analyst

Up first, welcome back to Atlanta not sure New Jersey has been great for your stock price so, I think much better coming back to Georgia. Second, just a little bit more around Rubbermaid commercial decision and just trying to understand, I had 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 now 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 you really felt like this was an integrated part of the rest of which is more consumer-facing business.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah, 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 company's brands, relative to 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 we didn't 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. Let me just provide a couple of statistics. So what 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's some opportunity to drive additional cost savings in the-- primarily in the supply chain of that business 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 continue down the path of selling the business.

Bill Chappell -- SunTrust -- Analyst

Got it. Thanks for the color.

Operator

Your next question is from Andrea Teixeira with JP Morgan.

Andrea Teixeira -- JPMorgan -- Analyst

Thank you. Good morning. So my question just following up to Bill's question on Rubbermaid Commercial so what is -- what is the run rate? I'm assuming that obviously the top line was not attractive and besides the fact that is not consumer-facing, I get the point about margins obviously, but what is the top line growth actually stand right now and where you think you can take it? And if you can give us like you gave -- Chris you give a good -- a like sense of what's happening at the appliances business, but where you're going to think that you can reinvest part of this margin into the business and where you think we can see stabilization of the trends on the top line for that one? Thank you.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah. 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 at down low-single digits. Now that we're including it in core sales we're 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 there is 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 [Indecipherable]. There is also a smaller part of the business that's 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 right-sizing and I think we've made very good progress there and so I think that as we look forward, we think that there is 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 time-frame here once we through that right-sizing activity on RCP. Relative to reinvesting back in the business I think I mentioned in the prepared remarks that we are 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 and 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 are 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. We're planning to increase 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.

Andrea Teixeira -- JPMorgan -- Analyst

And just to be clear, this is very helpful, the 100 base increase over a year ago is relative to the base that is already including-- so it's fully comparable, including commercial RCP back[Phonetic] right?

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Correct. So if you look at the guidance chart that we've put in the press release what you can see is that we've increased the guidance range for the full year 2019 versus 2018 by 110 basis points and 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.

Andrea Teixeira -- JPMorgan -- Analyst

Okay, perfect. Thank you very much.

Operator

Your next question is from Lauren Lieberman with Barclays.

Lauren Lieberman -- Barclays Capital -- Analyst

Thanks, good morning. I'm sorry to go back to the commercial products question, but I -- one of the things that was cited in the decision to include that business in the divestitures had been the notion of complexity of the portfolio and that,-- and of course when that was said it was certainly 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 stand-alone industrial facing business versus the rest it to solidly consumer-facing. Thanks.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah. So we've looked at the complexity reduction 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 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 fifty-fifty between commercial and consumer-facing businesses and the Rubbermaid brand is -- and driving branding and innovation applies equally and is a critical skill that 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.

Lauren Lieberman -- Barclays Capital -- Analyst

Okay, thank you. And if I can squeeze in one more, just a retail closures, obviously a lot of ongoing movement in the brick and mortar landscape and so questions around Bed Bath & JCPenney, so how are you thinking about that in terms of an impact on whether it's you're building it's things for this year, as you're planning ahead for 2020 and maybe in particular, how you might be approaching the planning cycle differently today than what might have been done at the company previously given this sort of, let's call it ongoing --changes in the landscape?

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah, 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 and 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 that we're back to core sales growth in the intern [Technical Issues] national 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 we're 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 unfortunately are being disrupted and losing share in the marketplace.

Lauren Lieberman -- Barclays Capital -- Analyst

Okay. Thanks so much, Chris. I appreciate it.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Thanks, Lauren.

Operator

Your next question is from Steve Powers with Deutsche Bank.

Steve Powers -- Deutsche Bank -- Analyst

Hey, thanks. Good morning, Chris.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Good morning, Steve.

Steve Powers -- Deutsche Bank -- Analyst

Maybe just to round out the RCP discussion, when you parse out all the moving parts, are you able to isolate it all, what portion of the updated $600 million to $800 million in operating cash flow you can now attribute to continuing ops, inclusive of RCP? I know you've historically been reluctant to provide that information, but I'm just hoping we can revisit it because I do think it's important to understand the go forward cash earnings power.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Sure. So --

Steve Powers -- Deutsche Bank -- Analyst

Okay.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yes, so first of all what I --

Steve Powers -- Deutsche Bank -- Analyst

I have a second question [Speech Overlap] -- sorry. I do have a second question as well.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Alright, let me answer the first.

Steve Powers -- Deutsche Bank -- Analyst

Okay, thanks.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Let me answer the first and then we'll come back to the second. So first of all, 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 is a total company operating cash flow. So really what's driving the $300 million increase in the guidance range from what was 300 to 500 to now $600 million to $800 million in 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 increase is really based on underlying performance of the business, is the first point.

Secondly, the decision to keep the RCP business will significantly [Technical Issues] the cash because the RCP business is a very strong cash-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.

Steve Powers -- Deutsche Bank -- Analyst

OK, 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 and other locations that will be impacted and consolidated into Atlanta. And then just [Indecipherable] just a feel for how confident you are that you can retain key personnel as you make that transition.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah. 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 a -- just under 100 corporate employees that will be affected by the move. So there is 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 100 roles that will be moving to Atlanta. We've gone through as you might imagine, a very specific exercise looking at 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.

Steve Powers -- Deutsche Bank -- Analyst

Okay, perfect. Thank you.

Operator

Your next question is from Priya Ohri-Gupta with Barclays.

Priya Ohri-Gupta -- Barclays -- Analyst

Great, thank you so much for taking the call. Chris, really appreciate the commentary around sort of your desire to maintain IG ratings in the focus on debt paydown. As you've spoken with the rating agencies would you be able to share sort of their perspective on the plan and whether they're on board with this being commensurate with the current ratings and if they're not, how could that potentially effect if at all, plans for future debt paydown and shareholder returns. Thank you.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

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 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 we're-- 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 the -- how the company is better positioned and strengthened going forward by keeping the RCP Business. I'm not going to speak for where they came out, but I am expecting that both of them will publish an update note either today or Monday with their conclusion from it, but I will say that we had very good meetings, and the meetings were very productive.

Priya Ohri-Gupta -- Barclays -- Analyst

That's helpful, and I guess just one housekeeping 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 as something that gets built into the base going forward or is it a one-time benefit? Thank you.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah. So of the 300 million increase it's about half that's coming from tax planning and about half that's coming from working capital management improvement. And so one of the things that you'll see in our guidance as 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 driving about half of the benefit is tax planning and about half is working capital management.

Priya Ohri-Gupta -- Barclays -- Analyst

Thank you.

Operator

Your next question is from Joe Altobello with Raymond James.

Joe Altobello -- Raymond James -- Analyst

Great, thanks, good morning. So, I guess the first question on RCP it looks like that business did about $1 million [Phonetic] in sales last year. You raised the sales guidance this year by $900 million, so are sales down in that business 10% and if that's the case, and two-thirds of the business is growing, that seems to imply the consumer piece is declining pretty rapidly if my math is correct.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah. So sales in that business are not down 10%. I think that when we did our guidance range we only guide the year to a single decimal point not to two decimal points, so you know 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.

Joe Altobello -- Raymond James -- Analyst

Okay, that's helpful. And then in terms of the third quarter guide core sales trends are implied to get worse, down two to four versus down one call it for the second quarter, and this is despite the fact that A&P is ramping up. So maybe give us a little more color on why you think core sales trend to decelerate in the third quarter.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah. 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 stacked 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 ou,-- with our plan for the year. So the minus two to four that we're planning in Q3 fits very well 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.

Joe Altobello -- Raymond James -- Analyst

Got you. Okay, thank you.

Operator

Your next question is from Kevin Grundy with Jefferies.

Kevin Grundy -- Jefferies -- Analyst

Hey, good morning, Chris.

Chris

Good morning Kevin.

Kevin Grundy -- Jefferies -- Analyst

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 and equally as easy comp I guess so that looked a lot better and then sort of tying that in with the core sales guidance that probably looks a little bit worse than folks had expected, was there any back-to-school shift there that ended up in Q2 instead of Q3?

So that's the housekeeping question and 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 believe 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 the 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 4th quarter call or perhaps down at CAGNY in February. So, any context with those questions would help. Thank you.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Very good. So let me start with the housekeeping question. So On the back-to-school ship in from and 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 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, there is 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.

On the housekeeping question, with regard to Ravi I've met Ravi, and I've talked with him a couple of times 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 both the Board and with Ravi about the five priorities as part of our turn-around plan and the Board and Ravi are both very supportive of continuing the effort and moving full speed ahead with our five priority efforts.

Joe Altobello -- Raymond James -- Analyst

Very helpful. Thanks, Chris.

Operator

Your next question is from Bonnie Herzog with Wells Fargo.

Bonnie Herzog -- Wells Fargo -- Analyst

Thank you. Good morning. Chris, I -- wanted to ask.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Good morning.

Bonnie Herzog -- Wells Fargo -- Analyst

I wanted to ask you about Yankees, 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 has that been progressing in terms of your expectations and wondering what you're seeing in terms conversion there. And then finally just love to get your long-term outlook for that business and if it's changed at all.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah, OK. 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 where we're 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 [Technical Issues] We expect to downsize the retail footprint over time and you'll 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 continue to decline broadly, but the rate of decline has slowed down because we but a aggressive effort at trying to drive better traffic driving initiatives, better conversion and an effort driving increase in average unit retail prices at the retail outlets, that's starting to gain some traction. That being said, the more important part of the business is what we're 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 WoodWick Brand and Walmart. Our business at Walmart is up strong double digits.

The category is growing strong double digits. The WoodWick brand in Walmart is leading an overall trade up in the category and what's happening is as we've made -- as we're pivoting to more of a wholesale business the wholesale growth is out-stripping 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 our European business back to growth. And so the European business went through a period where it needed to reset and I think we're on a good trajectory in that business driving growth broadly across the international markets.

Bonnie Herzog -- Wells Fargo -- Analyst

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 a big part of your business. But what's going on in these tracked channels, especially in categories that are weakening like appliances, writing and then food favorite beverage storage containers. Thanks.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah. So Nielson only covers about 20% 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 misses a lot of the parts of our business that are growing disproportionately fast, so I mentioned that we're growing our e-commerce 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 company's total results than perhaps what they were in the past. So, we certainly look at the Nielsen results but I think given that it's only 20% of the business, we're focused on the broader part of the business that is in the winning customers and channels.

Bonnie Herzog -- Wells Fargo -- Analyst

Right. Thank you.

Operator

Our next question is from Rupesh Parikh with Oppenheimer.

Rupesh Parikh -- Oppenheimer -- Analyst

Good morning and thanks for taking my question. So, just given some of --I guess some of the tariff news yesterday, just curious if you have any initial thoughts on the impact of new or whether any of this has been incorporated in your thinking for this year ?

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah. So it's hard to, it's a little bit hard to react to a tweet and we don't know a lot about it yet because the USTR office hasn't come out unless it's happened, while we're 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're 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 and which categories are not covered in and are there any things that are excluded and we've 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 will 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 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 it's a material impact of the company this year.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay, great. And then, I mean if it does go into effect any sense in terms of how to think about the exposure next year I don't know if there is any color you can provide in terms of your current exposure?

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah, --I think it's premature to do that just because we, given the amount of uncertainty Which categories that would cover, what the amounts are, how it would be implemented? I think it's premature so we certainly will provide that as the rules 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 planning process, but it's premature to speculate on the impact for next year and going forward.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay, and then my last question on tariffs. So I know you've taken, some actions on pricing year-to-date, so just curious how those actions are played out versus your expectations?

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah, 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 tariffs inflation in FX and allowed us to grow our gross margin by 50 basis points versus a 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 we're impacted by pricing it's not in every case, but 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 doesn't create a competitive advantage or disadvantage for anybody over the medium term.

Rupesh Parikh -- Oppenheimer -- Analyst

Great, thank you for all the color.

Operator

And we have time for one last question, which will be from Olivia Tong with Bank of America.

Olivia Tong -- Bank of America -- Analyst

Great, thank you. I wanted to talk a little bit more about margins you explained the SG&A with all the incremental advertising but gross margin was a big swing negative to positive this quarter. Can you impact that a little bit and can you sort of give a little bit of color into what the second half looks like on gross margin? Thank you.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah, so on gross margin we put a very concerted effort in improving our gross margins and the things that we're working on are reducing the company's SKU count. We've now reduced when I presented at CAGNY, I said that at the beginning of the year, we had 90,000 SKUs in the continuing operations business. We've already taken 12,000 SKUs out and we're down to 78,000 and so we've made a big improvement there. [Technical Issues] We also have announced that we're closing three manufacturing plants and 10 distribution centers and so we're starting to make effort --our 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 that the company has 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 is being somewhat masked by the impact of foreign exchange and tariffs and commodity inflation and that those impacts will be variable-by-quarter, but the trajectory on the underlying operating progress on gross margin is very strong and I expect it to continue.

Olivia Tong -- Bank of America -- Analyst

Got it. [Technical Issues] on the portfolio decisions that you've made, was it just to look at Rubbermaid Commercial or did you have a look at the rest of your business-- in the entire portfolio, and I realize it's not just one person's decision and you've got a new CEO coming, but as you think about the portfolio going forward what's the potential for even more change or a greater assessment relative to what you've already done?

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Yeah, 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 USPC which we've already signed a deal that we expect to close Mapa Spontex and Quickie are 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 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.

Olivia Tong -- Bank of America -- Analyst

Right. Thank you so much.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Okay.

Operator

Concludes our question-and-answer session. I will now turn the call back to Mr. Peterson for closing remarks.

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Thank you. I would like to thank everybody for part [Technical Issues]

participating in today's call and for your interest in Newell Brands. I also want to commend all my Newell 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.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Nancy O'Donnell -- Senior Vice President of Investor Relations

Christopher Peterson -- Executive Vice President and Chief Financial Officer

Chris

Bill Chappell -- SunTrust -- Analyst

Andrea Teixeira -- JPMorgan -- Analyst

Lauren Lieberman -- Barclays Capital -- Analyst

Steve Powers -- Deutsche Bank -- Analyst

Priya Ohri-Gupta -- Barclays -- Analyst

Joe Altobello -- Raymond James -- Analyst

Kevin Grundy -- Jefferies -- Analyst

Bonnie Herzog -- Wells Fargo -- Analyst

Rupesh Parikh -- Oppenheimer -- Analyst

Olivia Tong -- Bank of America -- Analyst

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