Newell Brands Inc. Q3 FY2025 Earnings Call

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

Thank you, Michelle. Good morning, everyone, and welcome to Newell Brands' Third 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. Today's remarks will also refer to 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 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.

Thanks, Joanne. Good morning, everyone, and thank you for joining us. The third quarter macro environment for general merchandise categories remained exceptionally dynamic and challenging. Numerous new tariffs were announced by both the U.S. and international markets, creating trade disruptions in affected categories. For perspective, we now anticipate Newell will incur $180 million in incremental cash tariff costs this year, which is up from our estimate of $155 million just 2 months ago. These trade disruptions have affected short-term consumer and retailer behavior. To respond to this, we employed a multifaceted plan. Specifically, we increased focus on productivity and overhead cost savings efforts. We sold incremental distribution and promotions in tariff-advantaged categories, and we took pricing actions where necessary to offset the tariff costs. While our team executed our plan well, it was not sufficient to offset the macro headwinds in the third quarter. Both core and net sales came in down 7%, which was below our expectations, due in large part to 3 discrete macroeconomic-related factors, namely lower retailer inventory levels, a slowdown in a couple of key international markets like Brazil, and lower consumer demand as we priced for tariffs more aggressively than competition in several categories. Combined, these 3 factors reduced third quarter sales by 4 to 5 points, which, along with 2 to 3 points of category compression, more than offset incremental tariff advantage business wins and a strong innovation program. The good news is that our consumer-driven product and consumer innovation programs are getting stronger every day, and starting with the fourth quarter and extending throughout 2026, net distribution gains are expected to exceed distribution losses. This stands in stark contrast to the 3 discrete macroeconomic factors that weighed on our business during the third quarter, which we believe will be short-lived. For example, our market intelligence suggests that the retailer inventory adjustment we experienced during the third quarter was largely onetime in nature, as higher inventory values due to tariffs were absorbed by the market and several large retailers shifted their business from direct import to domestic delivery. Relative to our international business, which accounts for roughly 40% of our total sales, we expect it will return to growth during the fourth quarter after heightened macroeconomic and political instability caused a slowdown in Brazil and Argentina, both top 10 international markets for Newell. This slowdown interrupted 6 consecutive quarters of international core sales growth. Finally, competitive pricing actions have begun to manifest themselves across several key businesses like Writing, where we have a strong domestic manufacturing presence. As more pricing hits the market in categories where we are tariff advantaged, we expect the amount of incremental business wins we secure to continue to increase. For these reasons, we remain confident that Newell's turnaround is on track and that the actions we are taking position us well to return to top-line growth in the future. Let's now turn to our 3 business segments, starting with Learning & Development. Writing held its own during a back-to-school season that all-in was roughly flat. Overall, we performed well with retail partners that prioritized and featured branded products, while isolated customers that shifted emphasis to private label alternatives experienced weaker sell-through. That said, we did expect stronger results because we anticipated competitors would take pricing prior to replenishment orders being placed and shipped. Instead, competitors waited until after the back-to-school season had ended to implement meaningful increases, which we are now seeing in October reflected at shelf. Looking forward and on the heels of recent product successes such as Sharpie Creative Markers and Expo Dry and Wet Erase, the 2026 Writing innovation program remains very strong. In addition, points of distribution will be considerably higher after a major retailer completes a total shelf reset this month and competitors who, unlike us, don't have strong domestic manufacturing capabilities raise prices. For these reasons, we feel very good about where we are headed with our Writing business. In Baby, we proactively took 3 rounds of pricing to offset inflation and tariffs. Competitors largely followed, and due to the strength of our Graco innovation program, we continued to gain market share despite leading pricing higher in the category. As we indicated last quarter, the Baby business was temporarily affected in the third quarter by a large retailer's decision to shift from direct import shipments to domestic fulfillment. Looking ahead, we have an exciting 2026 innovation pipeline for Baby, so this business is also trending well. Turning to the Home & Commercial segment and starting with kitchen. We have been proactively pricing throughout the year to offset tariffs and protect margins, but several competitors did not immediately follow. As a result, we took the decision late in the third quarter to increase promotional activity to restore price competitiveness, which will put near-term pressure on sales and margins as the broader market adjusts to higher sourcing costs and small kitchen appliances from Southeast Asia. Kitchen was also impacted by macro softness in Brazil and Argentina, where Oster is the market leader, which we expect to be transitory. In Home Fragrance, Q3 core sales were below expectations as some retail partners used the timing of the Yankee Candle brand restage to destock by liquidating older products before placing new orders. That said, where shelves have been reset with the new assortment, consumer demand has been strong, validating the direction of the relaunch. We remain confident that the restage will bring a return to growth in the fourth quarter of 2025 and for the full year 2026 as shelves are now largely reset and full A&P launch support is initiated. The Commercial business, which is anchored by the Rubbermaid Commercial Products brand, continues to perform well across the institutional and hospitality verticals where demand has been consistent. However, in the third quarter, this strength was more than offset by continued DIY softness where store traffic remains below prior year levels. Despite near-term top-line challenges, the Home & Commercial team continues to execute our simplification plan, driving cost efficiencies and positioning the segment for profit improvement as demand stabilizes. Finally, the Outdoor & Recreation business has started to turn the corner with third quarter sales being essentially flat with last year. Simplification efforts, tighter inventory management, and portfolio pruning are all delivering tangible improvement. And perhaps most importantly, we have a strong innovation lineup in place for 2026 that we are very excited about. We believe this business is on track to return to top-line growth next year. Mark will go into more detail shortly, but before doing that, I would like to call out a few things from a total company standpoint that were particularly notable in the third quarter and share some high-level thoughts on our updated guidance for the year. First, excluding the impact of the 125% China tariffs, which we called out last quarter, normalized gross margin would have expanded by 40 basis points in the third quarter versus a year ago. Second, normalized overheads as a percent of sales declined approximately 120 basis points year-over-year, the first reduction in 3 years as we realized savings from our realignment plan and technology investments. Third, advertising and promotion spending reached its highest rate as a percent of sales in nearly a decade, reflecting our commitment to invest in brand building and innovation even in a soft demand environment. Fourth, Newell's balance sheet remains solid. Net debt ended the quarter at $4.5 billion, down from the prior year, and our leverage ratio dropped by 20 basis points versus the second quarter. These proof points demonstrate that the fundamental structural economics of the company are much stronger today than before the transformation started. From a guidance standpoint, we are taking a more conservative view of consumer demand for the fourth quarter, and we now expect our categories in aggregate to be down about 3%. We continue to expect sequential improvement in normalized profitability in the fourth quarter as we continue to drive productivity gains, disciplined overhead management, and pricing actions that protect structural margins. We also expect cash flow to strengthen sequentially as tariff-related costs subside and working capital improves. In closing, while near-term demand remains uneven, our strategy is working, and our teams are executing with focus, agility, and discipline. I want to thank all of our Newell employees around the world for their continued resilience and execution in what remains a complex environment. Their focus and dedication make our progress possible. With that, I'll turn it over to Mark to walk through the financial results and provide additional detail on our performance and outlook.

Thanks, Chris. Good morning, everyone. Third quarter net sales were down 7.2% and core sales declined 7.4%, with the difference mainly driven by favorable foreign exchange. Normalized gross margin was 34.5%, down 90 basis points year-over-year as the positive impact from gross productivity and pricing was more than offset by headwinds from incremental tariff costs, inflation, and volume declines. Excluding onetime incremental 125% China tariff costs of about $24 million, which we called out during our Q2 call, Q3 normalized gross margin would have expanded by 40 basis points year-over-year. Normalized operating margin was 8.9%, which was down 60 basis points versus last year as a 120 basis point improvement in normalized overheads was more than offset by the previously mentioned reduction in gross margin and an 80 basis point increase in advertising and promotion dollars. Excluding the impact of 125% China tariffs, Q3 normalized operating margin would have expanded by 80 basis points to 10.3% in the third quarter versus a year ago. While Chris mentioned this earlier, it bears repeating, from this point, going forward, we expect overheads as a percent of sales to continue declining over the next several quarters as efficiency work compounds and productivity-enhancing AI-based tools are widely leveraged across the company. Net interest expense of $83 million was up $8 million versus last year, and a normalized income tax provision of $6 million with an effective tax rate of 7.9% was recorded in Q3. This resulted in normalized diluted earnings per share of $0.17, which was within the guidance range provided 3 months ago and slightly ahead of last year. Importantly, we were able to achieve this despite incurring about $55 million of net tariff P&L expense or approximately $0.11 per share in the third quarter. Year-to-date operating cash flow was $103 million versus $346 million last year. And given the importance of cash, let's take a few moments to fully unpack this situation. At the start of the year, we knew operating cash flow for 2025 was likely to be below 2024 levels for 2 reasons. First, we needed to pay out in early 2025, a well above target bonus related to the 2024 performance year, which was considerably higher than the below target bonus payout in early 2024 related to the 2023 performance year. Second, during 2024, we enjoyed outsized working capital benefits, having reduced our cash conversion cycle by 9 days. Now that being said, 3 quarters into 2025, we are running behind plan as it relates to operating cash flow for several reasons. First, we now expect to incur approximately $180 million of gross tariff cash impacts this year, which is up from $155 million from our last earnings call. The increase is driven by higher import volumes from China following our second quarter shipment pause, additional reciprocal tariffs on Southeast Asia and China, and additional items having been added to the tariff registry. Second, the discrete items Chris cited that negatively impacted third quarter sales created excess inventory, which as a practical matter, we will not be able to fully process through at this stage in the year. Finally, a reduced sales forecast and higher tariff costs for the full year leave us with less operating income than previously projected. Given these dynamics, our third quarter cash conversion cycle increased by about 4 days, but we still reduced our net leverage ratio down to 5.3x, which was a 20 basis point improvement over last quarter. Moving to the fourth quarter outlook. We expect net sales to decline 4% to 1% and core sales to decline 5% to 3%, with the difference being primarily driven by foreign exchange. Given this range, the core sales improvement we are calling for between third quarter actuals and the midpoint of our fourth quarter outlook of 3.5 points can be reconciled as follows: First, we believe the bulk of any onetime retailer inventory transitions away from direct import to domestic fulfillment are now behind us. In addition, retailer inventories have, generally speaking, already taken the higher inventoriable value of products associated with tariffs and any reduction in open-to-buy dollars into account. Second, we expect our international business to return to growth in Q4 as Brazil recovers from the macroeconomic disruption that occurred during the third quarter and as consumer confidence improves. Third, we have strengthened our fourth quarter promotion plans, and we are finally starting to see competitive price movement across several key categories, both of which should accelerate our unit velocity. Fourth, we expect to have more incremental tariff advantage wins in the fourth quarter than in the third. And finally, our fourth quarter innovation and marketing program is judgmentally the strongest we will have fielded since the Jarden acquisition. Going a bit further into the P&L, normalized operating margin for the fourth quarter is expected to be between 9% and 9.5%, which includes a significant favorable overhead impact from well above target incentive comp earned in the 2024 base period. With a tax rate in the low teens, normalized EPS is expected to be in the $0.16 to $0.20 range. Please note that this EPS range includes about $50 million or $0.10 per share of negative tariff impacts. Turning to our full year 2025 financial projections. Net sales are expected to decline 5% to 4.5% and core sales are expected to decline 5% to 4%. Normalized operating margin should be in the range of 8.4% to 8.6% and our EPS range is now $0.56 to $0.60. Within that range, we expect to incur a net 2025 P&L impact before any offsetting mitigating actions of $115 million related to tariffs, $10 million of which came through in Q2 and $55 million of which came through in Q3, leaving roughly $50 million in Q4. On a normalized EPS basis, this equates to approximately $0.23 per share, which impacted the second and third quarters by $0.02 and $0.11, respectively, leaving $0.10 for the fourth quarter. This 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 refinancing in May of this year. Finally, we are updating our full year operating cash flow guidance range to $250 million to $300 million, which incorporates our prior commentary regarding third quarter actuals and our fourth quarter estimates. We acknowledge this is considerably lower than when the year began, but it would also be fair to recognize that $180 million in incremental cash tariff impacts has had a negative impact on our end-year cash generation. Typically, we hold commentary related to the upcoming fiscal year for our fourth quarter earnings call. However, given the importance of cash and being mindful of our leverage ratio, we now expect to end the year at about 5x. There are a few things we would like to point out today relative to 2026. Specifically, we expect operating cash flow to strengthen significantly next year as both cash taxes and incentive compensation decline year-over-year. In addition, based on our preliminary reviews, we expect 2026 CapEx spending to be meaningfully below 2025 levels since several major IT and supply chain initiatives will be behind us. Finally, we expect our cash conversion cycle to drop next year and working capital to improve as this year's tariff inventory effects normalize. Before handing things off to the operator for your questions, we would like to offer 3 quick closing thoughts. First, while the macro environment remains fluid, we're confident our strategy is working. Looking ahead, we'll work to broaden distribution and continue to bring fewer but bigger and better-supported product and commercial innovations to market. In fact, right now, we have plans to launch over 20 gross margin accretive, differentiated, and consumer-relevant Tier 1 or Tier 2 propositions next year. Second, these innovations, along with our base business will be supported by more effective advertising at higher weights for longer periods of time. Finally, while tariffs have arguably set us back a couple of quarters on our journey towards a positive and sustained inflection in top line sales and additional balance sheet deleveraging, we continue to march forward with confidence and conviction that Newell Brands' best days still lie ahead. And of course, I would be remiss if I didn't echo Chris' comments about how proud we have been by the way in which the Newell team has proactively addressed the unique challenges that have been presented this year. The team's agility, resilience, and professionalism have been on full display throughout the year, and Chris and I are honored to be part of the positive transformation being effective at Newell Brands. Operator, we'll now open the call to questions.

Your first question comes from Lauren Lieberman with Barclays.

I have several questions. Firstly, we all met in September, right? You had the chance to comment on trends, and even though the back-to-school season was just starting, the shortfall isn't solely attributed to that. Can we discuss when you first became aware of the situation regarding organic sales? The miss is significant, and there are various factors at play. Given your connections with retailers, I would have expected you to have clearer visibility by that point in the quarter.

Yes. Thanks, Lauren. So if you look at the 3 factors that caused the miss, we knew that retailer inventory was going to decline in the third quarter. And in fact, we had talked about that, and we thought we had appropriately captured that in our guidance. However, the magnitude of the retailer inventory reduction manifested itself much more significantly than what we expected in the month of September. And so for example, we didn't know on the Home Fragrance business that retailers were not going to reorder the new product because they were going to be liquidating the old product. That really manifested in the month of September after the back-to-school conference. The second thing is the international business. The international business, which had been tracking for 6 quarters in a row in positive growth, really fell apart in September. And for perspective, Brazil, which is 1 of our top 5 markets, ended the quarter down 25%. And Brazil had been growing in high single digits pretty consistently. That really manifested itself much more dramatically in September after the administration put a 50% tariff on Brazil. We didn't know that was going to happen. Likewise, in Argentina, which is 1 of our top 10 markets, there was an election coming up, for the President's party in Argentina that caused retailers in the month of September to effectively stop ordering. So we went from a business that was doing very well there to a very negative situation in September. And so that sort of surprised us. And then I think the third thing was we took aggressive pricing action as we were very public about. Our third round of pricing went into the market July 28 and was starting to get reflected at retail in early September. We expected our competitors to follow. And what happened was in a number of categories, not in all, but in a number of categories, we got scraped by competitors who did not price, and that also began to manifest itself more significantly in the month of September. So I think the month of September, as we've been pretty public about, is the largest month in the third quarter. It always has been. And so that's what caught us by surprise was the confluence of those 3 factors, which really were back-end weighted in the quarter.

Okay. Following up on the aggressive pricing aspect, let's discuss categories. I know Baby is one category where pricing adjustments were necessary due to tariffs. However, for the other categories, it seemed your pricing didn't need to be as aggressive, considering your lower exposure to tariffs. I'm surprised by this and feel caught off guard by your pricing strategy in areas where tariffs shouldn't have had a significant impact.

Yes. So about 45% of our U.S. business is imported from outside the U.S. And we've been talking about diversifying our risk profile there, which we've been making good progress on. Interestingly, the Baby pricing went reasonably well. So cumulatively between the 3 price increases on baby gear, we've taken prices up close to 24%. Competition has largely followed in that category. And as I mentioned in the prepared remarks, we actually gained share in the third quarter. And so although the Baby sales were down, the POS on Baby was up significantly. It was more a function of the retailer shift from direct import to domestic delivery from one of the largest retailers in the country that put a temporary reduction on revenue in the Baby business. The place where we really got caught off-side was much more related to the kitchen business. So on the kitchen business, we had brands like Calphalon, Mr. Coffee, Crockpot that are imported from Asia, some of which from China, and we priced to recover the structural economics, and competitors basically didn't follow us during this period. Now part of that is understandable because we generally are the market leader in the categories in which we play, and competitors may have been waiting to see what we did before they took action. But the pricing that we put in the market turned out to position us as being uncompetitive in those businesses that are primarily sourced businesses.

Okay. Great. The last thing I wanted to ask is about the shift from direct import to direct delivery that you mentioned. Was it bigger than expected? I thought it was supposed to be a one-point shift from Q3 to Q4. Additionally, regarding the $24 million headwind from tariffs this quarter, it seems to be about half of what was anticipated. Was there also a shift in the profit headwind we might see in Q4? Is the impact from tariff timing due to slower sales growth? It seems like you didn't sell through as much of the tariff-affected inventory in Q3, and that's why we're seeing more of the impact in Q4.

Yes. On the tariff side, the $24 million Mark mentioned was just a one-time charge from the 125% tariff. However, the total tariff impact in Q3 was actually larger, amounting to $0.11, which aligns with our expectations. Therefore, there hasn't been a shift in our tariff outlook. Regarding retail inventory reduction, when we provided guidance for Q3, we anticipated about a 1-point headwind due to the switch from direct import to direct delivery. Based on our data, we believe the actual impact was about 2 points more than we expected. This wasn't solely due to the transition in delivery methods; it also included retailers reducing inventory in areas such as the home fragrance restage. Consequently, instead of the anticipated 1-point headwind, we experienced approximately a 3-point headwind from retail inventory reduction in the quarter.

Our next question comes from Filippo Falorni with Citi.

So Chris, obviously, you mentioned a very challenging environment on the macro side, and you're revising your category growth down 3%. I guess, what's the visibility there? I know this number has been revised down a couple of times this year. And I know it's challenging to forecast, but like what gives you the confidence that this 3% is the run rate? And then just a follow-up on Q4. Your core sales guidance assumes worse than category. Is there an assumption in Q4 of further destocking at the retailer level or market share losses?

Yes. When we considered the guidance for Q4, we wanted to take into account the recent miss in Q3. The category has been declining by about 2% to 3%. We opted for a conservative approach, estimating a decline of 3% for Q4. Additionally, due to the ongoing pricing challenges we experienced, we wanted to allow for the possibility that these might continue into Q4. Thus, we guided for a potential decline of 3% to 5%. The 3% decline reflects the higher end of our expectations, assuming we will keep pace with market growth, while the 5% decline assumes we will be significantly impacted by continued pricing pressures. We believe we have taken steps to improve our pricing competitiveness, as discussed earlier, but we didn’t want to set overly optimistic expectations for Q4 given the two factors we're facing. This shaped our guidance for the quarter.

Got it. And then just on the categories then like in your share gains and the potential for increasing shelf space in your categories where you are manufacturing advantage versus your competition. Like do you feel that we're going to see more of that in Q4? Or is there a bigger opportunity for '26?

We believe both opportunities are present. As we mentioned earlier, in our areas of tariff advantage, we have actively pursued additional shelf space and merchandising. We remain on track to achieve $35 million in extra business this year, a figure that has not changed from our expectations, with more of this coming in the fourth quarter compared to the third quarter, which is driving sequential improvement. Looking ahead to next year, we are optimistic that this number will be larger in 2026 than in 2025. Additionally, we are very hopeful about our position in the calendar year 2026. As noted in the prepared remarks, we now have over 20 Tier 1 and Tier 2 initiatives ready to be launched next year. For context, we started our turnaround effort in 2023 with just one initiative, increased to eight in 2024, launched 15 this year, and next year we will exceed 20. These innovations will cover every segment, including Outdoor & Rec, which we anticipated would take until 2026 to prepare for launch. We have a robust lineup of innovations set to debut next year, and retailer feedback has been very positive; several leading retailers have remarked that it is the strongest innovation portfolio they’ve seen from Newell in over a decade. Furthermore, based on our line reviews, our net distribution is turning positive in Q4, and we expect this trend to accelerate into next year. We believe we are taking the right steps to ensure the company grows faster than the overall market, positioning ourselves favorably as we approach 2026.

Our next question comes from Peter Grom with UBS.

So I wanted to ask a follow-up to that. And it's just kind of a clarification on the category growth in the guidance, and I apologize if I missed this, but the 3% down assumption versus, call it, currently running down 2% to 3%, and the commentary that it's coming off a miss versus expectations, which I think would suggest that you're embedding some flexibility here. But I guess I'm just curious on that, the category assumption because it does seem like when you listen to other companies in CPG or other consumer sectors, it seems like there's a lot of consumer uncertainty. And in many ways, trends are actually getting worse sequentially. So is it not plausible that the category would deteriorate to kind of that 3% number as we move through the balance of the year? Or is there something I'm kind of missing there?

No, I think it's certainly plausible. We meet with various input sources, including companies like Circana. We discuss outlooks with retailers and consider macroeconomic forecasts as we estimate market growth. The two main themes we're observing regarding consumer behavior and general merchandise broadly are that, firstly, there is a significant pullback among low-income households. It's notable that low-income consumers are under considerable pressure, and their purchasing behavior in general merchandise has decreased significantly compared to a year ago for the bottom third of U.S. households, and this trend continues. We have not seen any acceleration or deceleration in this trend, but it remains a challenge for the category. The second trend we are noticing is that younger consumers, those aged 18 to 24, are also significantly reducing their general merchandise purchases. This trend has been ongoing for a while and appears relatively stable. Therefore, we believe that setting the category growth rate assumption at the lower end of what we have observed so far is appropriate for entering Q4, based on the data we have analyzed.

Our next question comes from Andrea Teixeira with JPMorgan.

I would like to hear your thoughts on the visibility regarding the inventory destocking you mentioned, and I apologize if I missed any details. Additionally, have you adjusted pricing in Brazil and other countries in light of the tariffs? Lastly, could you discuss the exit rate? It seems you raised prices before your competitors, and in your release, you noted that as pricing improved, you observed better consumer response. Can you elaborate on how you are seeing consumer behavior change or how the price gaps are closing compared to historical data?

Let me address those points one by one. Regarding inventory destocking, we have clear visibility when a customer transitions from direct import to domestic delivery, as they typically provide us with several weeks or even months of notice. This allows us to manage our inventory effectively so that we are prepared before they start placing orders. Generally, we receive a lead time of about one to two months for such changes. We have already adjusted to all the moves we've been informed about, and currently, the share of our business that relies on direct imports is much lower than it has been in the past. At one time, direct imports accounted for 10% of our U.S. business, but now it is approximately 5% following recent shifts. As things stand, we do not anticipate any further transitions from direct import to domestic delivery for either the fourth quarter or next year, based on the information we have received. Therefore, we feel confident in our visibility on this matter and believe any impact from it is now behind us after being felt in the third quarter. In terms of retail inventory outside of the change in delivery method, we generally have good visibility because many retailers allow us access to their systems, where we can monitor their weeks of inventory related to our products. Our teams keep an eye on any risks regarding retailer inventories being disproportionately high in relation to their replenishment needs. While it’s not a perfect measure, typically, retailers maintain about 8 to 10 weeks of inventory across their systems. They could adjust that inventory by one or two weeks. Our main concern arises when inventories are either 3 or 4 weeks above or below the norm. Currently, we don’t see any such issues and believe that the retailer inventories at our major customers, where we have insight, are in line with historical patterns. Therefore, we believe that the challenges posed by retailer inventories are behind us. On the pricing front, starting with Brazil, we did raise prices in some categories when tariffs were implemented. However, we encountered a significant macroeconomic slowdown and faced pricing pressure in those categories, resulting in a dual impact on our business there. We have since adjusted our pricing strategies in Brazil to be more competitive, and we are starting to see stabilization in the macro environment in that market. In Argentina, the situation was less about pricing and more influenced by concerns surrounding the recent elections and the performance of President Milei's party. Following those elections, which yielded better-than-expected results for his party, market confidence has rebounded. Retailers had halted orders during the election period, but now they are beginning to reorder, indicating that the market is returning to normal and showing positive momentum. Regarding U.S. pricing in Writing, we anticipated that during the back-to-school replenishment phase, competitors facing tariffs might increase their prices. That did not happen initially, but we've noticed that in the past two weeks of October, retail prices for many competitor products have indeed risen. We have not raised our prices due to our domestic manufacturing capability, while competitors have seen price increases in the high single to low single digits. This situation gives us a competitive advantage in pricing and allows us to pursue more aggressive sales strategies and expand our distribution. The pricing movements happened recently, so it's still early to fully assess consumer reactions, but we are optimistic about our pricing advantage in Writing due to our tariff status, and we anticipate that this benefit will become more evident in the fourth quarter. On the Baby category, we’ve implemented three rounds of pricing adjustments and fully accounted for the tariff impact. Generally, competitors have followed suit. We had expected a one-to-one elasticity, meaning that a 24% price increase would correspond with a 24% decline in unit volume. So far, this has proven to be accurate, and in fact, we are seeing somewhat better performance as we gain market share in Baby products, particularly as consumers shift from premium brands to Graco, bolstered by strong innovation that surpasses competitors. We're confident about our Baby business. In the third quarter, core sales for Baby declined, primarily due to the shift from direct import to domestic delivery, but we expect to see a positive reversal in that trend moving forward.

Our next question comes from Brian McNamara with Canaccord Genuity.

First off, a week after you guys reported Q2, a large competitor of yours in small kitchen appliances suggested the U.S. market, excluding this competitor, declined at like a mid- to high single-digit clip in its category, suggesting you guys outperformed pretty well. I'm just curious how this particular category performed in Q3 given the pretty weak September.

Yes. Some of our small kitchen appliance competitors have reported organic sales growth down in the mid-teens, so we certainly did better than that. We're not the only ones affected by trade disruptions; these issues have impacted retailers too. When the 145% tariff rate was imposed on imports from China, ordering stopped, which caused a disruption in the supply chain. When orders resume, it takes time to get inventory through the supply chain and to retailers. This choppiness has hit the import business more than our self-manufactured products. Generally, U.S. manufacturers are better positioned to handle these disruptions compared to those relying on imported goods. This has been evident in our self-manufactured versus imported business performance. Looking ahead, we believe we have the strongest innovation pipeline we've seen in the past decade. Our distribution in the U.S. is expected to improve compared to this year. We are also making significant strides in reducing overhead costs, which should accelerate, especially with our advancements in artificial intelligence. We're implementing nearly 100 use cases and fully utilizing agentic AI throughout the company. As we approach next year, we anticipate a strong cash rebound due to lower cash taxes and reduced working capital needs, with tariffs already accounted for in inventory levels. We're also expecting some year-over-year benefits from incentive compensation and lower capital expenditures as we complete major ongoing projects. We will provide more details on our outlook in the fourth quarter call, but our focus remains on managing short-term challenges while keeping our goals for the midterm turnaround in sight.

Great. And just a quick follow-up. I think a key debate on the stock is whether you guys can sustainably grow again. So with A&P spending at a decade high, the tariff inventory adjustment at the retailer level, a onetime event, international expected to return to growth, why would Q4 be guided lower relative to your implied guidance prior? I think your prior guidance implied flattish kind of core sales growth.

Yes. So I think our Q4 guide is probably maybe 3 points below what the implied guide was last quarter, and it's really 3 things. Number one, we've taken a little bit more conservative view of the market. I think I mentioned minus 3. I think previously in our applied guide, we would have been probably assuming minus 2%. We've taken a little bit more conservative view on international just because of what we saw in Brazil and Argentina. And so that maybe is another point that we've derisked in the Q4 guide. And then we've taken, as I mentioned, a little bit more conservative view on price scraping because we don't know how quickly competition is going to raise price. And so that's maybe another point as well. So those are the 3 factors that would cause us in Q4 to take a little bit more conservative view versus what the implied guide was previously.

Our next question comes from Olivia Tong with Raymond James.

I wanted to ask you about the innovations that are coming, the 20 Tier 1, 2 innovations, which you talked about for next year. As you think about in the planning for that, you mentioned in previous remarks, the backdrop is more challenging. It sounds like the Yankee relaunch is off to a bumpy start. And you also talked about how low income and younger consumers are pulling back. So as you think about the planning for that, can you talk about your conversations with retailers, the seemingly deceleration in terms of categories, and just the general sort of malaise across these categories and launching innovation in that, how you may have to think about the growth expectations for that as we think about '26.

Yes. Good question. So what we're seeing is -- and I mentioned the broader consumer points. But the other point that we're seeing is when we come with compelling innovation that represents a good value, we are seeing consumers respond to that. So the reason we're growing market share, for example, in Baby is because we've launched outstanding innovation behind the Graco SmartSense Bassinet and Swing, the Graco 360 Easy Turn 2-in-1 rotating convertible car seat, which are off to great starts. The reason why we're growing and where we're growing in the Writing category is because of the Sharpie Creative Markers and the Expo Wet and Dry Erase. The reason that we're -- the place where we're growing the fastest in Outdoor & Rec is behind the Coleman Pro coolers that we've launched. And so it's an interesting market because although the consumer is pulling back on general merchandise categories, we are seeing if you come with a compelling innovation that represents a good value, and I differentiate good value from low price, you can have a good value proposition that's at the MPP or the HPP price point, but it has to be a good value and it has to be a compelling proposition. But when we do that, we are seeing the consumer broadly respond to that. And that's why we believe that it's right for us to continue to drive and invest behind innovation as we go into next year. I'm frankly pretty excited about what we've got planned next year, and we'll try to showcase -- we don't want to showcase it all on the earnings call today for competitive reasons, but we'll try to showcase some of it at some of the upcoming investor conferences that we go to. But I think it is pretty broad across our top 25 brands. And every single business unit that we have has a strong innovation pipeline next year. And so we are now at a point where we're a little over about 2.5 years into the new strategy. And recall, when we put the new strategy in place, one of our big planks was rebuilding and implementing brand management, completely rebuilding our innovation process. 2026 is really the first year that we'll have a full innovation across all of our businesses launching in the market as a result of that effort.

Our next question comes from Steve Powers with Deutsche Bank.

I was hoping we could just go back a little bit to where we started and just in terms of what happened in the quarter. Can you just talk a little bit about where you were coming into September? Were you in line with your prior guidance range? Because if you were, then I think the drop-off we're talking about in September is low to mid-teens, even factoring in the size of September. And then extrapolating from that, just a little bit about what you've seen so far in October and whether the guide, taking your points about the conservatism you've laid in, I'm just curious as to how much of a ramp is implied in the fourth quarter guide, especially because Yankee seems part of the problem or part of the setback in 3Q, and we know how big a business that is in December. So it seems a lot is dependent on that in the full year. So just some perspective there would be great.

Yes, let me clarify. At the beginning of the third quarter, our plan and guidance indicated that September would be our strongest month, with significant growth compared to the previous year. We had several reasons to believe that this would happen based on shipment timing and other factors. However, September fell short of our expectations, although it was not drastically different from July and August. In fact, September performed slightly better than July and August when compared to the prior year, but it was still significantly lower than our forecast. Moving into October, we’re seeing positive results, particularly with Home Fragrance, which is showing an increase compared to last year. This is a notable change from September and the overall third quarter, where it had declined significantly. We have factored in the early October results as we provided guidance for the fourth quarter, and we are not assuming an unrealistic increase in our forecast for Q4.

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.