Newell Brands Inc. Q2 FY2025 Earnings Call

Good morning, and welcome to Newell Brands Second Quarter 2025 Earnings Conference Call. Today's conference call is being recorded. A live webcast of the call is available at ir.newellbrands.com. I will now turn the call over to Joanne Freiberger, SVP of Investor Relations and Chief Communications Officer. Ms. Freiberger, you may begin.

Thank you. Good morning, everyone, and welcome to Newell Brands Second Quarter 2025 Earnings Call. On the call with me today are Chris Peterson, our President and CEO; and Mark Erceg, our CFO. Before we begin, I'd like to inform you that during 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, Form 10-Q 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 referred 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 are available and reconciliations between GAAP and Non-GAAP measures can be found in today's earnings release and tables that were furnished to the SEC. Thank you. And with that, I'll turn the call over to Chris.

Thank you, Joanne. Good morning, everyone, and welcome to our second quarter earnings call. Newell Brands demonstrated tremendous agility during the second quarter, definitely managing the short- and long-term needs of the business as all constituents across the consumer products value chain were being challenged by a very dynamic global macroeconomic environment. Strict adherence to the key tenets of our strategy, coupled with another quarter of strong operational discipline drove Q2 results in line with expectations across all financial metrics. With normalized operating margin and normalized earnings per share results, both being particularly noteworthy. Normalized operating margin increased 10 basis points versus a year ago, to 10.7% with all 3 business segments being positive for the first time since Q3 of 2022. The increase in normalized operating margin was driven by normalized gross margin, which increased by 80 basis points to the highest rate in 4 years at 35.6%. This was the 8th consecutive quarter of meaningful year-over-year expansion in gross margin as we continue to focus on dramatically improving the structural economics of the business. Normalized earnings per share came in at $0.24, which was at the top end of our guidance range despite incurring a higher-than-expected tax rate in the quarter. Relative to the top line, second quarter core sales was minus 4.4%, which was within our guidance range, but frankly, slightly below our operating plan. You may recall that since our new corporate strategy was deployed in June of 2023, core sales trends have dramatically improved each 6-month period going from down 14.7% in the first half of 2023 to down 2.3% in the second half of 2024. With second quarter results now posted, first half core sales for '25 came in at minus 3.4%, which is an improvement compared to last year, but does interrupt the steady sequential progress that had been delivered during each 6-month period up until now. Having said that, it's important to note that this was largely driven by category softness related to consumer pullback and retailer actions. We estimate market growth was down low single digits in the first half of 2025. This means Newell largely held market share during the first half of the year. From our standpoint, this is a notable improvement as prior to the implementation of the new strategy and the capability improvement projects, Newell had been consistently losing market share. Looking forward, we expect market growth to remain subdued as certain consumer cohorts remain under pressure. In this context, we are focused on continuing to improve our front-end capabilities and over the last several months, we have further strengthened our back half distribution, innovation, and marketing plans. While we are excited about what we have achieved in all 3 areas, distribution gains is the area where we'll spend the most time today because we continue to believe Newell Brands is well positioned to disproportionately benefit from the global tariff-driven trade realignment currently underway. Recall that more than half of our U.S. sales are manufactured through an extensive and highly automated North American supply base consisting of 15 U.S. manufacturing plants and 2 Mexico-based USMCA compliant facilities, none of which are subject to tariffs. And because we have invested nearly $2 billion across our North American production system since 2017, we have significant untapped capacity, which we can quickly access to help strategic customers keep their store shops full of high-quality American-made products that represent good value for their shoppers. In June, we shared notable tariff-related business wins that have been secured in food storage, vacuum sealing bags, markers, and home fragrance. Since then, considerable progress has been made. We have now secured incremental business in 13 of the 19 categories where we have domestic manufacturing capability. In addition, we have identified 10 other categories where we have a relative sourcing advantage versus competition based on country of origin and/or where we have existing tariff-free inventory available for incremental promotions. Collectively, we have successfully secured tariff-relative sourcing advantage or tariff-free inventory wins with over 30 customers across nearly every domestic channel where we go to market. Some of these business wins are large and some are small. Some of them are one-time in nature, whereas others have the potential to be much longer in duration. Some of them will present themselves in 2025 and others will not come online until 2026. However, in all cases, we are leveraging the scale, efficiency, and capabilities related to our 'where to play' and 'how to win' choices to accelerate our business and grow profitably. Turning to innovation. We remain confident that Newell's new strategy is working. As we shared earlier this year, our multi-year innovation funnel has now largely been rebuilt with exciting consumer-led proprietary products which will begin launching in a more sustained manner, starting with the second half of this year. In fact, our most recent and largest Tier 1 innovation launch for 2025 was just announced last week. And a pivotal evolution for the brand, Yankee Candle has officially launched a comprehensive brand refresh, an innovative initiative that reimagines the iconic fragrance experience with a premium product upgrade, modern design, and a deepened emotional connection to consumers. Grounded in consumer insights, this fragrance-first relaunch establishes a new benchmark for how heritage brands can evolve with purpose. To bring the refresh brand to life, Yankee Candle partnered with Brittany Snow, Actress, Director, and longtime fan. The Yankee Candle launch is supported by a full 360-degree marketing program and the products are being sold directly to consumers through company-operated stores, Yankee Candle's branded website, and third-party online and retail stores. Finally, from a marketing standpoint, we plan to invest more money in absolute dollar terms and as a percentage of sales during the back half of 2025 than during any 6-month period since 2017. This money will be invested behind a strong set of innovative new product launches using holistic 360-degree marketing campaigns with stronger return on investment expectations as our marketing capabilities have improved over the past 2 years. So for all of these reasons, we are confident that core sales during the back half of 2025 will improve sequentially versus the first half of the year. And broadly speaking, Newell's turnaround story is pacing well. The last thing I would like to comment on before turning the call over to Mark, who will walk you through the details, is how we have approached tariff impacts conceptually and at a high level in our updated guidance from both a top and bottom line standpoint. Recall that last quarter, we spent considerable time describing and walking everyone through the numerous parts and pieces of the global tariff picture. As we stand here today, we have a much better understanding of the various rate impacts but short and near-term shopper behavior over the next 3 to 6 months remains uncertain. On the one hand, inflation has moderated, employment trends are favorable, real wages are up, and the recently enacted legislation out of Washington has several notable new tax provisions, which should put more dollars into the hands of lower-income households while providing rate stability for moderate and high earners who typically look for more value-added MPP and HPP products. On the other hand, many consumers are still wrestling with the cumulative effect of several years of above-trend inflation and interest rates remain stubbornly high, which is depressing household formation, new housing starts and discretionary consumer purchases in general, but particularly for low-income consumers across general merchandise categories. Thus, while we are optimistic about the mid- and longer-term trajectory of the U.S. and global economy, we remain a bit cautious in the short term. Therefore, we are updating our core sales guidance range for the year to reflect category growth expectations at the low end of our prior range. This is being offset by better foreign exchange, which, in turn, has us in the top half of our prior net sales guidance range. As it relates to our structural economics and the bottom line, we made the determination that we will price where necessary to protect the gross margin gains we have achieved as part of our turnaround strategy. Consistent with this, after identifying and executing additional productivity and overhead reduction actions, we initiated 3 separate rounds of targeted tariff-related price actions in the U.S., 2 of which we discussed last quarter and went into effect April 1 and May 1, respectively. The first 2 rounds of pricing incorporated the initial 10:47 AIBA 20% China tariffs and the 25% tariff on aluminum and steel. The most recent price increase with a July 28 effective date included pricing where necessary to cover the additional 10% China and Rest of World where reciprocal tariffs exist. The combination of our cost reduction efforts and these pricing actions has put us in a position where we believe we will be able to fully offset all of the currently announced and either in effect or soon to be, in effect, tariff actions that are expected to be permanent in nature, which we believe is a tremendous accomplishment by the Newell team and represents the absorption and offsetting of about $0.16 per share. The only piece of tariff-related impacts, which is worth about $0.05 per share, we don't plan to recover, is the one-time cost related to the incremental 125% share of China tariff that was only in effect for a limited period of time. While we immediately suspended future orders once that rate was announced, we did incur that rate on in-transit goods that could not be delayed. Since those costs will not be ongoing, we believe it would be inappropriate and shortsighted for us to reduce planned advertising and promotional investment, eliminate or cut back on organization capability enhancements being developed or to price to recover these nonrecurring transitory costs. As I turn the call over to Mark, who will provide additional details, let me state we expect sequential top line progress to resume going forward based on distribution gains, innovation launches, and marketing programs. And we remain on track to expand normalized operating margins, grow normalized earnings per share on a tax-equalized basis by double digits, grow normalized EBITDA by mid- to high single digits, and improve Newell's leverage ratio versus the prior year during 2025. To the extent additional tariff-related pricing actions are necessary, we will act accordingly, but we think pricing actions for 2025 are now largely behind us. In closing, I would like to thank our dedicated employees for their continued agility, resilience, and grit demonstrated throughout this dynamic environment. Their continued commitment to operating with excellence makes it possible for Newell Brands to delight consumers around the world.

Thanks, Chris. Good morning, everyone. Second quarter 2025 core sales came in at minus 4.4% and while net sales contracted slightly more at 4.8% due to unfavorable foreign exchange and business exits. The international business, which accounts for nearly 40% of Newell's total sales, delivered a 6th consecutive quarter of positive core sales growth in both the Writing business, which is our most profitable, and the Home Fragrance business grew core sales. Normalized gross margin expanded by 80 basis points to 35.6% during the second quarter, which was the highest it has been in 4 years and represents the 8th consecutive quarter of substantial year-over-year improvement. Gross productivity savings and pricing more than offset headwinds from inflation, lower unit volume, which negatively impacted factory absorption, and a slight tariff headwind, which I will elaborate on momentarily. During the second quarter, Newell's normalized operating margins also expanded, increasing by 10 basis points to 10.7%, with advertising and promotional levels as a percentage of sales being comparable to last year. This, of course, implies that overheads increased as a percentage of sales despite being down in absolute dollars as we continue to build out the essential capabilities required to consistently grow profitably in our industry. The reason we want to call this out is because starting with the third quarter and continuing into the fourth quarter of 2025, we expect overheads as a percentage of sales to decline for the first time since our new strategy was put into effect, which we think is notable. Net interest expense of $82 million reflected an increase of $4 million versus a year ago and a normalized income tax provision of $24 million was recorded in Q2, resulting in an effective tax rate of 19.2%, which was higher than the mid-teens rate we projected 3 months ago. Despite having a higher effective tax rate, which negatively impacted the quarter by $0.02, we delivered normalized earnings per share of $0.24, which was at the high end of our guidance range. Operating cash flow was an outflow of $271 million versus a cash inflow of $64 million in the prior year. Recall that Newell's business is seasonal with operating cash flow typically running negative during the first half of the year before turning positive in the second. That said, we did proactively and selectively purchase some inventory ahead of anticipated tariff-driven cost increases which negatively impacted first half operating cash flow and more recently, we took additional steps to ensure that we are rightsizing our back half inventory levels. Our net leverage ratio for the quarter was 5.5x, which was slightly above Q2 of 2024, but we still expect a year-end leverage ratio of about 4.5x as we move over time towards investment-grade status. Beyond posting solid financial results, there are 2 other substantive items that took place during the second quarter that we would like to quickly mention. First, we added financial flexibility in Q2 by fully redeeming the remaining $1.25 billion of April 2026 outstanding bonds. The bond offering was 4x oversubscribed, which we believe is indicative of broad investor support behind Newell Brands corporate strategy, which has enhanced top line performance, strengthened our balance sheet, and fundamentally improved our structural economics. Second, Newell's very capable IT team partnered with the business to successfully complete 2 additional ERP integrations during the second quarter. Home Fragrance was moved from Oracle to SAP, and 2 instances of Datasul in Brazil were migrated over to a single instance. With these 2 large moves behind us, we are in a position to complete our ERP harmonization efforts by the fall of 2026, which would be a fabulous outcome given that immediately following the Jarden acquisition, Newell Brands had 42 different ERP systems. Turning to the outlook. We are updating full year 2025 financial projections to reflect a number of factors. First, what we believe to be short-term category softness due to temporary consumer pullback in discretionary categories as consumers and retailers remain focused on food and everyday essentials. Second, the positive progress we are making on tariff-related relative sourcing advantage or tariff-free inventory business wins. Third, foreign exchange rates. Finally, the timing and impact of all known tariff costs and our offsetting mitigating actions. Starting with the top line. Chris indicated, we are assuming a low single-digit decline across our product categories in aggregate for the balance of the year. However, partially offsetting this negative impact is about $30 million of incremental back half sales related to the various business wins already secured from leveraging a strong domestic manufacturing position and a best-in-class sourcing and procurement team. Before the year is over, this number is expected to grow even more as we look to secure additional in-year wins and strive to make the wins we've already secured even larger. And while we're discussing 2025 right now, it warrants mentioning that since it takes time for retailers to change their shelf sets and merchandising opportunities that are typically planned and managed several months out, we have secured even more wins in dollarized terms in 2026. Taking all this into account, 2025 net sales are expected to be in the top half and core sales in the lower half of the prior guidance range. This means both net sales and core sales are now expected to be between minus 3% and minus 2%. The outlook for normalized operating margin remains unchanged at 9% to 9.5%, which at the midpoint represents roughly a 110 basis point improvement from 2024 and is more than double our evergreen target of a 50 basis point improvement each year. Before moving on to earnings per share, let's fully unpack our tariff situation, so everyone's on the same page. Last quarter, we talked about various buckets of tariffs, and we provided a sensitivity as it related to the incremental 125% China tariffs. We did that because at the time, we felt that this approach would provide our shareholders and potential future holders of Newell Brands stock with helpful perspective. This time around, because the overall tariff picture has come into a better view, we can boil things down quite a bit. So simply put, if we take everything we know from all of the individual country and/or regional tariff deals that have been announced to date and all of the commodity-specific actions that have been taken on things like steel and aluminum, it equates to an expected incremental cash tariff cost on a gross basis of approximately $155 million versus 2024. From a country standpoint, China accounts for about 80% of this amount, which is why for the past several years, we've been so focused on moving our supply base out of China. While $155 million is the expected incremental cash tariff cost on a gross basis, that is not the amount that will hit our 2025 P&L because tariffs are inventoriable costs. That means they are capitalized or suspended into inventory when incurred and only recognized in the P&L when actually sold. Therefore, we expect roughly $50 million of this $155 million gross impact will not hit our 2025 P&L even though it will affect operating cash flow. This leaves a net 2025 P&L impact before any offsetting mitigating actions of $105 million, $10 million of which came through in our Q2 results, leaving approximately $55 million expected in Q3 and $40 million expected in Q4. On an after-tax EPS basis, $105 million equates to $0.21 per share, $0.02 of which fell into Q2, leaving $0.11 and $0.08 expected for Q3 and Q4, respectively. The reason Q3 is expected to be higher than Q4 traces back to the incremental 125% China tariffs that were in effect for a period earlier this year. While orders were dramatically curtailed during that time period, we did incur about $25 million of gross cash impacts because shipments already in transit were burdened by this extra cost, which importantly was included in the $155 million number I referenced earlier. This $25 million or $0.05 per share is also being temporarily suspended in inventory, but because these purchases were earlier in the year and these items are expected to turn very quickly, virtually all this amount will hit our Q3 P&L. With that detailed understanding and Chris stating earlier that mitigating cost reduction and pricing actions have been implemented to fully offset all of the currently announced and either in effect or soon to be in effect tariff actions that are expected to be permanent in nature, updating our full year EPS guidance range is very straightforward. We simply took our prior range of $0.70 to $0.76 and subtracted the $0.05 that are not permanent in nature and which, therefore, we are not seeking to recover. Doing so brought us to $0.65 to $0.71. Then because we have another quarter of actuals under our belt, we felt comfortable tightening that range by $0.01 on both the top and bottom end, which yields an all-in full year updated guidance range of $0.66 to $0.70. Please note that this new updated normalized EPS range still assumes an effective tax rate in the mid-teens and includes a higher level of expected interest expense due to our recent refinancing. The last thing to call out related to 2025 is we have tightened our operating cash flow range primarily due to the cash impact of higher tariffs on inventory valuations and now expect to finish the year somewhere between $400 million and $450 million. For the third quarter of 2025, we expect both net and core sales to decline 4% to 2%, normalized operating margin to be between 9.1% and 9.5%, and with a tax rate of around 10%, normalized EPS of $0.16 to $0.19, which again includes about $55 million or $0.11 per share of negative tariff impacts prior to any offsetting actions. While we don't provide Q4 guidance, it can be easily calculated at this point, thus, please note that for modeling purposes, Q4 of 2025 is expected to include a significant favorable overhead impact from above-target incentive compensation earned in 2024. In closing, despite a very fluid macroeconomic environment, we remain confident that our strategy is working. Looking forward, we have exciting plans to gain more distribution, launch fewer but bigger gross margin accretive, differentiated, and consumer-relevant MPP and HPP products with more effective advertising at higher weights for longer periods of time. In addition, we believe we have a tariff advantaged domestic production network that is gaining momentum as leading retailers look to diversify their sourcing strategies.

Your first question comes from Andrea Teixeira with JPMorgan.

Can you comment both Chris and Mark, if you're seeing the back-to-school? It seems as you pointed out that category has probably outperformed what your expectations were? And then if you can also comment from the exit rate across all categories, including outdoors and your stated innovation embedded in your guide?

Let me start with back-to-school. It’s a bit early to assess consumer demand for back-to-school, but the next four weeks will be crucial. We’re optimistic about our sales and preparations for these important weeks. We achieved record high fill rates, shipping out all pre-display setups for back-to-school at an unprecedented quality level from our supply chain. As previously mentioned, we secured exclusivity in several high-share categories like EXPO and Sharpie markers with multiple retailers, which positions us well. We'll have a better understanding of consumer behavior in four to six weeks. Regarding innovation in the Writing category, we are pleased with the new Sharpie creative markers, which include new colors and tip sizes that are appealing to consumers. We also launched a vibrant ink and a Wet Erase marker for the EXPO brand, both of which have started successfully. In the Baby category, we continue to experience strong growth. We originally saw high core sales growth in the first quarter, and while we anticipated some decline in the second quarter due to retailers ordering baby gear ahead of tariffs, the Baby business remains positive for the first six months. The Graco SmartSense bassinet and swing, along with the Graco 360 Easy Turn 2-in-1 rotating convertible car seat, are gaining market share. In Home and Commercial, we are excited about a significant innovation scheduled for this year. We recently announced a complete brand overhaul for Yankee Candle, introducing a new wax formulation, updated labeling, a fresh marketing campaign, and new vessels. Early feedback from both consumers and retailers has been very encouraging. With our kitchen products, the Oster Extreme Mix Blender has launched successfully in the U.S. and is performing particularly well in Latin America. We’re also relaunching Rubbermaid EasyFindLids, significantly enhancing our food storage business in preparation for a stronger second half of the year. On the Commercial side, the RCP BRUTE farm program is showing strong initial results. In Outdoor & Recreation, we are seeing strong performance from the Coleman Pro cooler in the U.S. coupled with a sponsorship deal with Kane Brown. Additionally, our Coleman business in Japan is back to growth, where we lead the market. Looking ahead, we’re excited about upcoming innovations expected in early 2026, with promising discussions happening with key Outdoor & Rec retailers. Overall, we are confident about our innovation strategy and remain on track for growth in the future.

Our next question comes from Brian McNamara with Canaccord Genuity.

So look, a ton of progress has been made in the turnaround, you're about 26 months in now, but with core sales moving in the wrong direction, what's driving that? If innovation is working, what isn't? And then I understand the market is tough, but some peers are growing significantly in spite of this. So why should current or prospective investors be confident the strategy is working?

Yes. I touched on this a bit in the prepared remarks. We continue to achieve sequential progress on core sales growth. In the first half of this year, we experienced a decline of 3.4%, which is an improvement compared to the same period last year and a significant improvement from before we implemented our strategy, when we were down 14.7%. We are moving in the right direction. Improving front-end capabilities and the innovation reboot will not happen overnight. However, we believe we have a strong innovation pipeline that is already showing results in certain parts of the business. We've managed to return the Writing and Baby segments to consistent growth over the past several quarters. The International sector is contributing to core sales growth, and in the second quarter, we returned the Home Fragrance division to core sales growth. While we still have work to do across the entire portfolio, we are clear that, due to the timing of the innovation development cycle, the Outdoor & Rec category will lag behind. That being said, even for Outdoor & Rec, our core sales trends have improved sequentially, and we believe we are headed in the right direction. The reason our sales were down 4.4% this quarter, a deceleration from the previous quarter, is mainly due to the timing of retailer shipments and the challenging growth dynamics in the category. Nonetheless, we are confident that we will improve core sales trends going forward, starting in the latter half of this year.

Yes. But if I could add just a couple of things. I mean, if you look at the gross margin in the second quarter that we just printed, and you compare that to the 2-year stack. We're up 680 basis points. We've said that this year, we're going to grow our operating margin by about 110 basis points at the midpoint. We've said that our EPS on a tax-adjusted basis will be up double digits. We've said that our trailing 12-month EBITDA by the end of the year will be up mid- to high single digits, we're deleveraging the company. We've also said based on the third quarter and full year guidance we provided that, in effect, we're calling Q4 core sales to be flat. We're also talking about the fact that our second half advertising and promotional spending as a percentage of sales will be the highest level since literally since 2017, right? So all the things that are out there that we've said will come to pass are coming to pass. We always said that sales will be the last long pole in the tent to come up, but we have a great innovation program that's coming out the door as we speak, and we're gaining distribution because of all of our tariff-advantaged business positions.

Our next question comes from Olivia Tong with Raymond James.

Lots of details so far on the innovation pipeline and some of the wins in terms of the additional categories that you're getting shelf space on. But based on your full year outlook, it looks like core sales would be up roughly 2% to 4% in Q4. So, can you talk about what drives such a material inflection from where you expect to be in the first 3 quarters versus Q4? Are there particular brands, categories, channels, etc., that are driving that?

I'll let Chris provide some backup detail. But if you look at the full year guidance we just provided and the third quarter guidance we just provided, I think you would see that core sales in the fourth quarter are effectively being called at roughly flat.

Yes. And then relative to that improvement of heading into the implied Q4 guide of relatively flat on core sales, I think there's a couple of things that are supporting that. Number one, the tariff distribution wins that we're getting do tend to be more Q4 weighted because of the timing of implementation, both from a shelf set standpoint and from an incremental merchandising standpoint. The second thing is some of the big innovation that we've launched, for example, the Yankee Candle relaunch. The big quarter for Yankee Candle is Q4. So we expect the innovation to have a more material impact in Q4 than Q3 slightly. And then I would say the third thing is, we have been working with a number of retailers on reinventing their store shelves. And some of those store shelf resets get implemented in October. And so we believe that the distribution gains are going to be bigger in the fourth quarter because of the underlying fundamental progress in addition to the tariff-related wins heading into Q4. So we think we're on the right track. And we think, as Mark said, from what we see today, we're not guiding to Q4, but the implied guidance would put us about flat in core sales in Q4.

Got it. And then with respect to the pricing that you have implemented, could you talk about retailer response to the Baby pricing, any other actions that you might be contemplating? Apologies if you talked about this at the beginning of the call, since I was a bit late.

Yes, there's no need for concern. Regarding the pricing changes we've made, retailers have generally reacted positively, recognizing that our adjustments are primarily based on cost considerations. Importantly, we are not just depending on price increases to offset tariff expenses. We are also focusing on achieving additional productivity savings and reducing overhead costs to maintain a competitive cost structure. Furthermore, we are assessing areas where the impact of tariffs cannot be lessened, which may necessitate price increases for consumers. Overall, the feedback from retailers about the pricing changes has been understanding, and they have accepted our new pricing. The main challenge we've faced in discussions with retailers has been about the timing of these price changes. Retailers prefer not to feel disadvantaged compared to their competitors, so we are careful not to create advantages or disadvantages among them. From a consumer perspective, the pricing we have implemented, particularly in the Baby category, has not fully reflected in retail prices yet. The recent price adjustment focused on Baby took effect just a few days ago, so I anticipate that retail prices will begin to increase gradually in the coming month or two based on our pricing to retailers. We are closely monitoring consumer reactions to these changes. We expect that the entire category will see price increases. While we have not factored in any additional pricing into our forecasts, we do anticipate some volume loss related to these price changes. Therefore, we believe our planning strategy has been cautious. As we proceed, we'll determine if any adjustments are necessary, but we are keeping a close eye on the situation.

Thank you. Your next question comes from Bill Chappell with Truist Securities.

Chris, I appreciate your enthusiasm for innovation, and I understand that in some categories, it's been a long time coming. However, just because innovation has had a significant impact in Baby and Learning doesn't guarantee it will have the same effect in categories like Yankee Candle or Rec & Leisure. I'm trying to grasp if you have any past experience where you've seen meaningful innovation impacts. Have your competitors in these areas been stagnant, leaving you to operate in a vacuum? Also, it seems that category growth is necessary for your growth, yet you're discussing categories at the lower end of a conservative outlook. I'm interested in understanding your confidence in this, not just regarding distribution gains, but in the overall growth of the categories and your business as we approach 2026.

I'd like to address a few points regarding category growth and its impact on Newell. Category growth is influenced by macroeconomic factors, and while we may perform better or worse than these growth rates, we must plan accordingly. Currently, general merchandise categories are facing challenges as consumers focus on essentials like food, housing, and insurance. However, we expect category growth rates to improve as we move into next year, though we are not in a position to predict specifics for 2026 at this time. We believe that the downward trend in general merchandise won't last indefinitely. Regarding innovation, we've observed that in each category we compete in, there are competitors achieving significant growth through innovative strategies. This indicates that these categories are very receptive to innovation, and when done successfully, innovation can lead to growth that not only outpaces the category but can also boost category growth overall. Therefore, category growth isn’t entirely beyond our control. We've identified six businesses that we believe will thrive because they respond well to innovation, not just in Baby and Writing, but also in Kitchen, Home Fragrance, Commercial, and Outdoor & Rec, where we've achieved notable growth through new product innovations. Since launching our new strategy in June 2023, we've recognized that our innovation capabilities needed significant improvement. We’ve strengthened our brand management and consumer insights functions, allowing us to test innovations with consumers and retailers before market launch. As we enhance these capabilities, we are witnessing variations in core sales growth across different categories. However, we anticipate having most of our capabilities fully operational by early 2026 across all segments. Our goal remains to return to a sustainable core sales growth of low single digits, as stated when we introduced our strategy. We expect improvements to reflect in our financials, particularly in margins and cash flow. Our gross margins have increased significantly over the past two years, with operating margins also improving despite facing a tariff impact. We're guiding for mid- to high single-digit growth in EBITDA this year, building on strong growth from last year. Moreover, we've reduced our leverage ratio significantly since announcing our strategy. We believe we are on the right path and that these positive trends will lead to broader improvements in our financial performance, ultimately resulting in stronger top-line growth as we progress.

Your next question comes from Filippo Falorni with Citi.

I wanted to ask about the environment at the retailer level. Are you observing any effects from inventory destocking in some of your categories? What trends are you noticing in repurchase levels? Additionally, regarding your earlier question about pricing, how do you view the competitive response? We have noticed some categories becoming a bit more promotional, with certain private labels gaining share. I'm interested in what you're experiencing in terms of competitive reactions to promotional pricing.

Yes. In Q2, we noticed some impact on retailer inventory, primarily related to about 5% to 7% of our U.S. business, which involves direct imports. This means that products produced in Asia were taken by retailers there before being imported to the U.S. After the China tariffs were enacted, some retailers paused their direct import business temporarily, leading to slight changes in their inventory levels. While this did not significantly affect stock levels at retail, it did impact our shipments in the short term. Overall, we haven't observed major changes in retailer inventory for the bulk of our business, which comes directly from our U.S. distribution centers, and we still believe retail inventories are in relatively good condition. Regarding pricing, it's somewhat difficult to gauge due to the influence of Amazon Prime Day and its effects on other retailers. We're trying to understand the dynamics of everyday prices versus promotional prices. The tariff situation adds complexity to this. Generally, we observe that in many categories impacted by tariffs, prices are increasing, but not uniformly. There's not a noticeable uptick in aggressive promotional pricing, and some competitors are postponing price increases because they have inventory that hasn't yet been affected by tariffs. We anticipate that the pricing landscape will become clearer in the next 3 to 6 months as the inventory from before the tariffs diminishes and price hikes are more evident at retail. Although the current situation is a bit unclear, we are monitoring it closely. Notably, in over half of our business where we aren't facing tariffs, we aren't raising prices, which we believe will enhance our consumer value in the coming months. For the categories where we have raised prices, we think competitors will likely follow suit, but the timing and adjustment will vary by category and competitive landscape.

And your last question comes from Peter Grom with UBS.

I have two quick questions. First, can you help us understand how much of the sequential improvement in sales is driven by distribution gains and innovation compared to what we might expect from category growth? Second, looking ahead over the next several years, while most of today's discussion has focused on the top line, I'm interested in how we should view margin progression. You've done an excellent job with gross and operating margins despite declining sales, so when the top line starts to grow again, how should we think about the profit benefits?

Let me address the first question about category growth, and then I'll hand it over to Mark for comments on margins. In terms of our core sales guidance for the year, we initially anticipated a decline of 1% to 3%. In this update, we've narrowed that to a decline of 2% to 3% for the year. The primary reason for this adjustment is our revised outlook on category growth. Last quarter, we estimated a category decline of 1 to 2 points, but now we’re looking at a decline closer to 2 points. This change has led us to revise our core sales outlook for the year, entirely driven by category growth. We remain confident that we are making progress with our initiatives related to distribution gains and innovation, and this does not affect our outlook. That's the current situation from a top-line perspective.

Yes. As far as the longer-term question is concerned, I mean, when we first put the strategy out at Deutsche Bank a number of years ago, we said our interim targets were to have gross margin in the 37% to 38% range. We acknowledge and recognize that we needed to get advertising and promotional levels up. We said that ultimately, we think the end spot there is probably somewhere in the 6.5% range because some brands have more, some brands have less. We talked about the fact that we do need to get our overheads down, and that's why we're really excited that starting with the third quarter of this year, overhead as a percentage of sales will start arcing downward, which will be another catalyst to really start driving operating margin at a greater rate. As we've been building up the capabilities, a lot of that gross margin progress has gone into A&P and has gone into the overhead line, but we think that's going to inflect. And once that inflects, frankly, we don't see going back the other direction. So we're really very bullish on what we think we can do as it relates to that. We told people from the beginning that once we get to that first base camp of that 37% to 38% range, we'll then talk about what's next. But as you think about what we've been building, we've been building an integrated system. And that integrated system has very high fill rates. We've got great customer service. We have the ability to monetize the next incremental unit at a very high rate because of the automation programs we put into effect. And so the math that we've done internally makes both Chris and I and the rest of the leadership team very optimistic about our future here at Newell.

Thank you. This concludes today's conference call. Thank you for your participation. A replay of today's call will be available later today on the company's website at ir.newellbrands.com. You may now disconnect. Have a great day.