Newell Brands, Inc. (NWL) Q3 2021 Earnings Call Transcript

Newell Brands, Inc. (NASDAQ: NWL) Q3 2021 earnings call dated Oct. 29, 2021

Corporate Participants:

Sofya Tsinis — Vice President of Investor Relations

Ravi Saligram — President and Chief Executive Officer

Christopher Peterson — Chief Financial Officer & President, Business Operations

Analysts:

Bill Chappell — Truist Securities — Analyst

Andrea Teixeira — JPMorgan — Analyst

Olivia Tong — Raymond James — Analyst

Peter Grom — UBS — Analyst

Chris Carey — Wells Fargo Securities — Analyst

Kevin Grundy — Jefferies — Analyst

Lauren Lieberman — Barclays — Analyst

Presentation:

Operator

Good morning, and welcome to the Newell Brands’ Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. The live webcast of this call is available at ir.newellbrands.com.

I will now turn the call over to Sofya Tsinis, Vice President of Investor Relations. Ms. Tsinis, you may begin.

Sofya Tsinis — Vice President of Investor Relations

Thank you. Good morning, everyone. Welcome to Newell Brands’ third quarter earnings call. On the call with me today are Ravi Saligram, our President and CEO; and Chris Peterson, our CFO and President, Business Operations.

Before we begin, I’d like to inform you that during the course of today’s call, we will be making forward-looking statements, which involve risks and uncertainties. Actual results and outcomes may differ materially, and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Form 10-Q and our SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements.

Please also recognize that today’s remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures can be found in today’s earnings release and tables as well as in other material on Newell’s Investor Relations website. Thank you. And now I’ll turn the call over to Ravi.

Ravi Saligram — President and Chief Executive Officer

Thank you, Sofya. Good morning, everyone, and welcome to our call. We delivered solid results in the third quarter, which reflect the effectiveness of our strategy as well as the resilience and agility of our operating model and portfolio. Year-to-date, core sales grew 15.2% versus 2020 as each business unit contributed to such a terrific outcome. Normalized operating profit improved over 21% and normalized earnings per share increased about 14%. We further strengthened our track record as the third quarter marked the fifth consecutive quarter of core sales growth and sixth straight quarter of domestic consumption growth for the company.

Core sales in the quarter increased 3.2% driven by excellent performance across five business units, Writing, Baby, Home Appliances, Home Fragrance and Outdoor & Recreation. This was no small feat given the difficult year ago comparison of 7.2% core sales growth, which embedded a recovery across the majority of Newell’s businesses. To normalize for pandemic-related shifts, we think it’s useful to compare this year’s top line to 2019. On a two-year stack basis, Newell’s core sales grew low single digits in the third quarter. We also saw strong domestic consumption relative to 2019 across each of our business units, a terrific result and a testament to the significant progress we’ve been — that we’ve made in forging stronger relationships with shoppers as we leverage consumer insights and foresights in new product launches.

The resurgence in our Writing business continue. The team has done a superb job during the important back-to-school season with outstanding performance in consumption and share momentum. As anticipated, top line trends moderated against elevated year ago results in our Food and commercial businesses. However, sales as well as domestic consumption for both business units remain about 2019 levels.

Consumer behavior will undoubtedly evolve and categories will continue to normalize, but we believe that home-as-hub mindset will linger on, as well the heightened interest in outdoor activities and personal well-being. It’s also evident in the company’s consumption trends as domestic POS remains well ahead of 2020 and 2019 levels both in the third quarter and year-to-date, despite supply constraints.

Core sales in North America mirrored that of the total company. Outside North America, Latin America stood up once again, delivering another quarter of double-digit growth despite elevated comparisons. I’m also delighted that the strength of our iconic brands continue to come through this year, harnessing the benefits from the fortified innovation funnels and our brand-building efforts. Year-to-date, many of our largest brands such as Graco, Coleman, Oster, Yankee Candle, Sharpie, Rubbermaid, First Alert, Paper Mate, Dymo, EXPO, Ball and Mr. Coffee delivered excellent top line growth. Our brand strength has also helped to successfully implement price increases.

We are laser-focused on protecting the company’s gross margin. And if necessary, we will take additional pricing actions to ensure that we fully recoup the impact of inflation over time.

Similarly, to the second quarter, e-commerce top line grew mid-single digits with digital penetration close to 22%, slightly above last year and significantly ahead of the mid-teens level from 2018. We continue to invest behind our omni capabilities and are well positioned to capitalize on consumer demand regardless of where they shop.

Let me spend a few minutes on our business units beginning with Writing, the third quarter superstar. Core sales increased at a double-digit rate, driven by broad-based strength in the U.S. and international markets. Core sales grew on a two-year stack basis as well, even though the commercial channel has not fully recovered yet. This is a testament to the excellent health of our Writing business. Consumption in the U.S. has been strong throughout 2021 and accelerated sequentially in the third quarter as we leaned into the business momentum with higher A&P investment.

The vast majority of K-12 schools in the U.S. returned to in-person learnings. During the back-to-school season, we saw a strong rebound in everyday Writing business. which benefited from innovations such as Sharpie S-Gel and Sharpie S-Note, strong merchandising plans and distribution gains. We picked up considerable share during the quarter in our Writing business as a whole, including key back-to-school categories such as pens, pencils, glue, permanent markets, dry erase markers and highlighters.

Over the past two years, we’ve meaningfully enhanced Newell’s position in the pen category, where we’ve gained over 850 basis points of share. Thus far, in 2021, within highlighters, Sharpie S-Note has tripled its share of the growing highlighter market segment. Core sales for our Baby business increased at a double-digit rate, supported by terrific domestic consumption growth, both relative to 2020 and ’19. Q3 marked the fifth consecutive quarter of core sales growth driven by expanded points of distribution, innovation, continued strength in e-commerce as well as stimulus funding.

While Baby is the most highly penetrated business online with the Newell’s portfolio, we leveraged our omni progress to further boost our digital penetration in the quarter into the mid-50s. We believe child tax credits as well as increases in disposable income and durable goods consumption have all benefited the gear market over the past several quarters. While the category is likely to moderate, we expect it to remain healthy. In the U.S., Graco continued to gain momentum and picked up share in the rapidly growing market.

Home Fragrance turned in its fifth consecutive quarter of core sales improvement as core sales grew both versus the elevated 2020 level as well as relative to 2019, driven in large part by EMEA. In the U.S., Yankee Candle retail stores maintained their positive growth momentum, benefiting from consumers increased mobility. As we continue to expand our omni capabilities, we rolled out buy online and pick up in stores as well as ship from store options across our Yankee Candle retail stores, which drove a favorable response from consumers and helped us to fulfill consumer demand. As anticipated, consumption moderated relative to the elevated base period but was significantly ahead of the 2019 level.

Home Fragrance, along with Writing and Food are our growth and value accelerator businesses, and I see tremendous run rate for growth ahead. The team is gearing up for the holidays as Q4 is a crucial period for the business.

In the third quarter, the Food business lapped its toughest double-digit core sales growth comparison of 2020 and was exacerbated by supply challenges, including a COVID-related lockdown of our Sistema plant in New Zealand, resulting in core sales decline. However, both top line and domestic consumption were meaningfully ahead of the 2019 base, which highlights the stickiness of the habits that consumers developed throughout the pandemic. We expect the category to continue to normalize, and that’s been most evident on the cookware side.

We drove strong share momentum in Food Storage and Food Preserving. Recent innovations such as Rubbermaid TakeAlongs meal prep, the updated Rubbermaid beverage line as well as Brilliance Glass have been instrumental in driving market share improvement for Rubbermaid as they elevate the consumer experience. In Fresh Preserving, Ball pantry storage latch and Ball nesting jars have contributed to share gains for Ball.

In Home Appliances, core sales increased for the sixth consecutive quarter, even as we lapped the toughest double-digit comparison of the year. Latin America once again led the charge. In this market, our beloved Oster brand is spearheading the trend for multicooking functions and recently launched Oster toaster oven with air fry as well as Oster rice cooker with air fry. Throughout 2021, Oster blenders are celebrating the 75th anniversary in the U.S. and Latin America with brand activation and new product launches in each region.

Domestic POS remained significantly ahead of 2019 levels and only modestly below last year’s level, although the category continues to normalize relative to the outsized growth levels seen throughout the pandemic. Despite the fact that people have come back to dine-in restaurants, consumers continue to show interest in cooking at home post the pandemic.

In our commercial business, core sales declined versus the elevated base as the business cycled against a significant surge in washroom solutions. On a two-year stack basis, gross sales increased nicely during the third quarter. The team has done a great job in landing new wins, both on the B2B and retail sides, across a wide swap of categories ranging from cleaning and refuse to material handling and others. We saw healthy POS and tracked channels but have been significantly challenged on the supply side. The team is diligently addressing these constraints as well as inflationary pressures.

During the third quarter, core sales for Connected Home & Security business were under pressure despite very strong consumption in the U.S. Core sales softness reflects both a challenging year ago comparison as we were restocking inventory at retail last year as well as component availability challenges in the current year mostly due to the well-publicized chip shortage.

Our Outdoor & Recreation business delivered its third straight quarter of core sales growth at nearly 2% against a difficult year ago comparison of 8%. Core sales improvement was fueled by the strength in the outdoor equipment and on-the-go beverage categories with the latter continuing to rebound during improved consumer mobility. We are encouraged by the momentum in the outdoor and equipment unit with POS exceeding 2019 levels.

The consumer continues to show interest in outdoors, a trend we think will endure and one we will continue to leverage throughout our innovation. Coleman turned another quarter growth benefiting from enhanced product lineup in 2021 with strong plans in place for next year as well. Many of our Coleman products such as the Skydome tent, cooler bag and two-burner stove are featured by USA today as perfect gifts for people who love to travel. So keep them in mind for the holidays.

Strong results thus far gave us confidence to improve our outlook on both top line and normalized earnings per share in 2021 despite significant inflationary and supply chain-related pressures that continue to plague the industry. Our updated guidance for 2021 implies that normalized operating profit is expected to grow high single digits, a great outcome, particularly in the context of a difficult operating environment.

Although we are certainly not immune to the external forces the strategic decisions we have actioned over the past several years have substantially strengthened the company and have made our portfolio much more resilient.

First, we invested in omnichannel capabilities that have been instrumental in capturing consumer demand across all channels and, on the direct-to-consumer side, recently completed migration of our sites in North America to one consolidated platform with a dedicated team focused on continuous improvement on consumer experience. We substantially strengthened our innovation and marketing muscle, leveraging consumer insights and foresights.

And we’ve sharpened brand positioning for many of our top brands. We have established joint business plans and enhanced relationships with key strategic retail partners. We’ve instituted a new hybrid organizational model that brings our domain experts closer to our customers and consumers while leveraging the center for scale and efficiencies.

We have made productivity a way of life. We’ve reduced complexity and overheads, improved cash conversion cycle and strengthened the balance sheet.

2021 has been a turning point for Newell despite challenges posed by supply and inflation. Our teams have done an incredible job executing in this environment. And we are poised to deliver 10-plus percentage core sales growth this year, a first for our company in recent history. We recognize that 2021 has been a tale of two cities, a first half and second half story. We delivered 23% core sales growth in the first half. And in the second half, we are lapping strong growth from 2020. The fact that we grew 3.2% in Q3 on top of last year’s growth is an indication that our brands are resilient, are being rejuvenated, and we have the ability to grow even in this context of strong comps. The power of our diverse portfolio is coming through.

The macro issues in the pandemic have taught us that we just cannot be reactive. We’re laser focused on continuing to strengthen the fundamentals and reducing complexity, including lowering SKU count, improving forecast accuracy, simplifying our IT infrastructure and making it easier for customers to do business with us. We are creating an integrated one Newell distribution network through the consolidation of over 20 supply chains under the banner of Project Ovid.

Looking forward, we expect supply challenges and inflation to persist. Therefore, our stance is one of preparedness and realism and taking proactive actions to successfully navigate the macro environment. If 2021 was a year of turbocharging the top line, 2022 will be focused on improving margins, improving margins through five primary levers.

First, an intense focus on pricing and optimizing promotional spending. We have now taken price increases in 2021 across all of our eight businesses in most geographies. Our posture will be to maximize the impact of carryover pricing from ’21 into ’22. And we will be prepared to take further increases in ’22 based on inflationary trends to protect gross margin. Of course, we’ll do this in consultation with our customers and ensure that our brands remain a great value for consumers. Second, we’ll accelerate our efforts to improve the profitability of our international business. by reducing duplication, consolidating operations and adopting a one new approach. Third, we will price innovations to be margin accretive. Fourth, we will continue to be more efficient with our overheads. And finally, we’ll continue to be — strive to be best-in-class in our productivity efforts and drive about 3% to 4% improvement in COGS as we have done over the last few years.

I’m extremely thankful to our 31,000 hard-working employees for their unwavering commitment, tenacity and perseverance. I remain optimistic that Newell can create tremendous shareholder value, and our best days are ahead of us, onwards and upwards. And now over to Chris.

Christopher Peterson — Chief Financial Officer & President, Business Operations

Thank you, Ravi, and good morning, everyone. During the third quarter, we delivered solid results as we continue to drive our strategy into action. Strong operational execution, coupled with financial discipline, enabled us to generate better-than-anticipated operating profit and sustained progress on the cash conversion cycle. We accomplished this in the context of a choppy operating environment as our teams did a terrific job navigating through a myriad of supply and logistical bottlenecks.

Before getting into the details, I want to provide a little color on the current operating environment and proactive choices we are making. Similar to other companies, throughout the third quarter, we continued to experience significant inflation and supply chain disruption. Escalation in cost has been an ongoing dynamic throughout 2021. While inflationary pressures have been broad-based, the largest impact for us has been around commodities, particularly resin, ocean freight, sourced finished goods and labor.

The expected headwind from inflation on 2021 cost of goods sold is now forecast to be about $40 million worse relative to our expectations last quarter. We currently expect inflation to represent 9% of our full year cost of goods sold as compared to our expectation of about 3% at the start of the year.

We have taken numerous actions to alleviate the headwind from inflation, including leading in on our productivity initiatives, implementing price increases across all of our businesses with some announcing multiple rounds, continuing to exercise disciplined control over expenses, driving efficiencies from promotional spend and leveraging strong top line growth.

The full benefit from the mitigating actions to offset the unprecedented inflationary pressures will not flow through until next year, given the timing lag on pricing. We do expect that Q3 represents the largest gap between the pricing and inflation impact to the P&L and expect this gap to narrow sequentially from here.

Despite this dynamic and the continued escalation in costs for Q4, we are raising our normalized EPS guidance for this year towards the higher end of the previous range. a strong outcome and a testament to the resilience and excellent execution by our teams.

Moving on to supply chain. Lead times for sourced products, some components and raw materials have increased significantly from pre-pandemic levels as a result of port congestion, limited container availability as well as shortages in the labor force and truck drivers. This has been an ongoing challenge throughout 2021. However, the significant progress we have driven on SKU rationalization over the past few years, along with an early start on mitigating tactics, have put us in an advantage and allowed us to largely meet the strong demand.

Some of the actions we’ve taken early in 2021 and throughout the year include the following: building inventory on top-selling and high priority SKUs, improving our forecasting process and adjusting it for longer lead times, diversifying our supplier base where feasible, accelerating automation across our factories and distribution centers and enhancing compensation, benefits, training opportunities and working conditions for our frontline employees. In fact, during the third quarter, we announced meaningful wage increases across many of our factories and distribution centers starting in Q4.

We do not expect the supply pressures to dissipate in the near term, but we are confident that we are taking appropriate steps to both effectively manage them and create more agility within our supply chain in the future. We recently announced a new supply chain initiative, Ovid, which is expected to transform Newell’s go-to-market capabilities and end-to-end customer experience in the U.S., enhance customer service levels and drive significant operational efficiencies. We are planning to optimize the company’s distribution network in the U.S. by consolidating 23 business unit-centric supply chains into a single integrated supply chain. We expect it will take about 18 months to fully implement Ovid.

To minimize any potential disruption we intend to roll it out in waves. During Q3, we passed an important milestone as we completed blueprinting and the integrated design phase. We are now moving into the testing and implementation phase. Upon completion, Ovid is expected to streamline, automate and digitize our supply chain and position us as a reliable retailer partner of choice. While Ovid was being contemplated, prior to the recent events, once implemented, it should position us on a much stronger footing going forward.

Let’s now move to third quarter results. Net sales grew 3.3% year-over-year to $2.8 billion mostly driven by a core sales increase of 3.2%. This was an excellent outcome as we cycled against 7.2% core sales growth in the year ago period with difficult comparisons across every segment, except for learning and development.

Normalized gross margin contracted 330 basis points year-over-year to 30.6%. Gains from fuel productivity savings, favorable business mix as well as pricing were more than offset by the inflationary headwind, which was nearly 800 basis points in the quarter. Normalized operating margin came in at 11.4%, down from 14.9% a year ago, reflecting gross margin pressure as well as a significant step-up in advertising and promotion expense.

We continued to tightly manage costs and drive overhead to sales ratio lower year-over-year. Net interest expense came down by $6 million year-over-year to $65 million reflecting debt reduction of about $750 million relative to last year. The normalized tax rate was 8% versus a normalized tax benefit of nearly 7% in the year ago period due to a lower contribution from discrete items. Normalized diluted earnings per share amounted to $0.54 as compared to $0.84 in Q3 of 2020. The unfavorable move in the tax rate accounted for about $0.12 year-over-year.

Now turning to our segment performance. Core sales for the Commercial Solutions segment decreased 9.2% due to declines in both the commercial and Connected Home & Security business units, which faced tough year-ago comps. Core sales for Home Appliances grew 1.9%, primarily driven by Latin America. Core sales for the Home Solutions segment were down 3.6% as core growth in the Home Fragrance business was more than offset by a decline in food, which lapped its toughest quarterly comparison of 2020.

Core sales for the Learning & Development segment grew 19.6% as both the Writing and Baby business units delivered strong double-digit increases. Core sales in the Outdoor & Recreation segment increased 1.7%.

Newell’s net sales were 8.5% above the third quarter of 2019 with each of the company’s segments exceeding levels from two years ago. On a two-year stack basis, core sales increased in the low double digits during Q3 as well as year-to-date periods. Year-to-date, in 2021, the company’s operating cash flow was $490 million versus $820 million in the year ago period. This reflects an increase in working capital to support top line momentum and elevated in-transit times for inventory, which more than offset significant operating income growth. We continue to drive improvement in cash conversion cycle, which came down by another 10 days to 79 days.

At the end of the third quarter, Newell’s leverage ratio was 3.1 times, down from 3.9 times a year ago. The improvement reflects our proactive choice to pay down debt as well as a mid-teen increase in trailing 12-month normalized EBITDA. In Q3, the company redeemed approximately EUR300 million of its 3.75% notes that were due in October 2021. Furthermore, in mid-October, we announced our intention to redeem the remaining $250 million of the company’s 4% senior notes next month.

We have significantly strengthened Newell’s balance sheet over the past several years and recently indicated that we are targeting a leverage ratio of 2.5 times, below our prior goal of 3 times. We intend to grow our EBITDA into this target with no immediate plans for additional new debt tender offers.

This morning, we updated our outlook for 2021, accounting for the stronger-than-anticipated performance in Q3, further escalation in costs in the fourth quarter, continuation of supply chain disruption as well as a relatively healthy consumer backdrop in the U.S. We are pleased to once again raise our top line forecast for 2021 as a result of healthy consumption and the early actions we have taken to alleviate the supply chain constraints.

Our revised top line guidance implies that core sales are expected to grow versus 2019 during each quarter of 2021. Our outlook also indicates that core sales will be up versus 2020, in the first and second halves of 2021 as well as for the full year.

Let’s go through the details of the full year 2021 outlook. We currently forecast net sales of $10.38 billion to $10.46 billion, up from $10.1 billion to $10.35 billion previously. This represents about 11% year-over-year growth. We are raising our core sales outlook to 10% to 11% from 7% to 10% previously with the majority of the upside in the fourth quarter. While the U.S. dollar has strengthened recently, currency favorability is still expected to modestly outweigh the impact from Yankee Candle retail store closures and other minor business exits.

As a result of further escalation in costs, including our decision to raise wages for the front line, starting in Q4, we now expect full year normalized operating margin to be slightly down relative to 11.1% in 2020. Our updated forecast implies that normalized operating profit grows at a high single-digit rate, a solid result when factoring in the unprecedented level of inflation. We anticipate an increase in the absolute level of advertising and promotion spending. This forecast assumes a mid-teens normalized effective tax rate and a slight increase in shares outstanding.

We are pleased to improve our full year normalized earnings per share outlook to $1.69 to $1.73 from a previous range of $1.63 to $1.73. There is no change in our full year operating cash flow guidance of approximately $1 billion as we continue to expect acceleration in Newell’s cash conversion cycle.

Focusing on the fourth quarter, we are guiding for net sales of $2.6 billion to $2.68 billion with core sales expected to be within a range of down 2% to up 1%. Our guidance assumes normalized operating margin of 8.7% to 9.2% versus 11.4% in the year ago period as inflation is expected to outweigh the continued benefits from productivity and pricing. We are forecasting a normalized effective tax rate around 20% and normalized earnings per share in the $0.29 to $0.33 range.

While we are still early in our budgeting cycle for 2022, I wanted to provide a high-level perspective on how we are approaching it. We are encouraged by the progress our teams have made on the innovation side and have a strong funnel of new ideas planned for next year. However, we anticipate a more muted top line delivery due to a very difficult comparison.

While inflation is expected to remain above normal levels, we are looking at significant benefits from carryover pricing as well as productivity. This should result in stronger margin performance in 2022 relative to 2021. We will continue to build operational excellence across the organization as we roll out additional automation projects and make strides with Ovid implementation. We intend to provide more specifics during the fourth quarter call, as has been the norm in recent years. We believe we have a strong path for value creation, and we’ll continue to diligently execute on our strategic agenda to ensure that we position Newell Brands for sustainable and profitable growth. Operator, let’s now open the call for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Bill Chappell with Truist Securities.

Bill Chappell — Truist Securities — Analyst

Thanks. Good morning.

Ravi Saligram — President and Chief Executive Officer

Good morning, Bill.

Bill Chappell — Truist Securities — Analyst

Just a question on Writing in particular, I mean, how that played versus your expectations in the quarter, whether there’s still kind of some carryover as you move into next year and how much of that maybe contributed to the upside. I know you had kind of a muted outlook. We’re not really sure on kind of the tail of back-to-school and back to office. So any color there would be great.

Ravi Saligram — President and Chief Executive Officer

Sure, Bill. Good morning. How are you? This is Ravi. Look, Writing really performed very well. I think the big thing was we weren’t sure when we went into the quarter, we knew we’d have a good back-to-school, but there was some worries about the Delta variant. I think what became evident was this is one of the issues. Keeping the schools open for in-person learning was a fairly bipartisan view. And so we watched it by week and saw that the super majority of schools opened — and so that was great. But also a credit to our team because they really hit the ball out of the park on merchandising, on e-commerce, on getting distribution, on innovation. They just have the whole package. And this is, as we have said before, one of the business — this business because we manufacture most of our products, except for Dymo, which comes from China, in Tennessee. And so we were able to have good supply. So I think that really helped. And this is still in the backdrop because we had expected maybe offices to start opening up, but because of Delta, they didn’t as much.

So despite all of that, the fact that the business did extremely well, I think, is positive, and we’re seeing that positive momentum continuing. So we’re very pleased. And yes, it is probably a bit better than our expectation. But look, when you have the highest margin business, we will take that any day.

Bill Chappell — Truist Securities — Analyst

Sure. No, absolutely. And then kind of on that same — in terms of supply chain, as I don’t think you really said anything there. But as you look at kind of Home Appliance and getting things from Asia going into the holiday season, are you — is it any concerns you don’t have enough inventory for what looks to be a pretty strong upcoming holiday season? I know Home Fragrance, you make it all here but thinking more of anything that you’re bringing overseas.

Christopher Peterson — Chief Financial Officer & President, Business Operations

Yes. So Bill, on that one, we’re actually in very good shape. So one of the things that we did early on when we saw the supply chain pressure starting to build, and particularly with ocean freight, is we adjusted our planning process to add expected lead time to the planning process. We did that probably about six months ago, four to six months ago. And as a result, we sort of early ordered a bunch of our top-selling SKUs. And that’s why — if you look at our balance sheet, part of the reason why our inventory levels are significantly higher than they were last year, and we’ve used cash to build inventory. So we feel, particularly in the appliance category, that we are well positioned to meet strong demand from an inventory standpoint.

Bill Chappell — Truist Securities — Analyst

That’s great. Thanks so much.

Christopher Peterson — Chief Financial Officer & President, Business Operations

Thank you, Bill.

Operator

Our next question comes from Andrea Teixeira with JPMorgan.

Andrea Teixeira — JPMorgan — Analyst

Thank you. And I wanted to just go back to what you just said, Chris, on building inventory ahead of the holidays. And you had done, I mean, a fantastic work in terms of getting market share in the small appliances, but we also have to be cognizant of the cycle of these products, right? And some of these have been bought in, and I would say household penetration probably increased.

So I was wondering what is your take on that? And what are your customers saying in terms of demand ahead of the holiday? And I also wanted to double check when the cadence of pricing and what is the carryover that you mentioned before into 2022. And you said that you want to take additional actions into ’22. So I’m hoping to see the cadence of your gross margin progression as we enter ’22.

Ravi Saligram — President and Chief Executive Officer

Andrea, we’ll split the question into two pieces. I’ll have Chris answer the pricing piece, and I’ll just give you a view on appliances. Clearly, the number one business for us when you go into holiday, the Super Bowl is for Home Fragrances. And we believe we are well poised on the Home Fragrance side not only with all our customers but also in our own retail stores. As far as small appliances goes, but we’ve had — we’ve been very — I’m very pleased to see the progress the team has been making and that we’ve had so many quarters of growth.

Yes, clearly, as we look down the future, you have to say, is it — has there been some acceleration of consumer purchases. But having said that, I think there are several categories within appliances, and we’re driving a lot of innovation. So with the whole Mr. Coffee iced, we now have ice coffee frappe. We’ve got hot and cold. So we’ve got a lot of new innovations coming into the market there, that will help us. So — and we’ve actually brought in new users. So I think in the main, I feel we’re in a good place. But at the end of the day, look, you have to view you will not — you can’t look at it just as one particular business for the entire portfolio. And that has been the beauty of how we manage the portfolio in entirety to work each quarter and to work the long term to say how do you drive growth as a whole.

Christopher Peterson — Chief Financial Officer & President, Business Operations

On the pricing front, let me try to provide a little bit of perspective. So at this point, we have announced pricing on every single one of our business units. The inflation impact is affecting our business units a little bit differently. The two most significantly affected business units are the Commercial business and the Food business. And then there are other businesses like Writing and Home Fragrance, for example, that are much less affected by inflation, but everybody is affected. Because of that difference in terms of how the inflation is impacting the business units and because the inflation picture has continued during the year to get significantly more of a headwind, we’ve announced pricing on different timings. And so the first set of pricing, broadly, that we put into place went into place kind of in the April, May, June time period. The good news about that pricing is that pricing is now fully reflected in retail. And at least to date, we have not seen any negative reaction to consumer demand from the pricing that we put in so far. And so that — we take that as a very positive sign.

There is a second round of pricing, broadly, that’s going into effect that we’ve already announced that largely is going into effect in either November or beginning of January. And so when you look at the pricing impact in the P&L, the pricing impact in the P&L is going to get significantly bigger as we go forward sequentially from here. So pricing will be a bigger help in Q4 than it was in Q3. In Q1 of next year, pricing should be largely implemented and it will be a bigger help in Q1 of next year than it is in Q4 of this year. At the same time, inflation, we think, Q3, is if spot rates stay where they are, inflation will have been the biggest impact for us in Q3 of this year, and we’ll begin to mitigate as we lap base periods. And so that gap, if you will, between inflation, pricing and productivity, we think Q3 was the biggest delta of that gap, and we think that gap starts to close and reduce sequentially each quarter going forward.

Andrea Teixeira — JPMorgan — Analyst

That’s great. Super helpful. I’ll pass it on. Best of luck.

Operator

Your next question comes from Olivia Tong with Raymond James.

Olivia Tong — Raymond James — Analyst

Great. Thank you. Good morning. My question is first around project Ovid. I know this was planned before the global supply chain challenges start. But can you just talk about why now is the right time for it? Presumably, there will likely be some disruption as you do switchovers and consolidate. So could you just expand a little bit more on that and if you had to expand the plan more recently given all the logistics challenges globally?

Christopher Peterson — Chief Financial Officer & President, Business Operations

Yes. So let me try a couple of things. So we kicked off Project Ovid about 10 or 11 months ago. We didn’t announce it until Barclays, but we kicked it off 10 or 11 months ago. And the reason why we thought now is the right time is because we’ve made a lot of progress on SKU rationalization. So if you recall, at the end of 2018, when we started with the turnaround plan, the company was trying to sell over 100,000 SKUs. We’ve now reduced that through last year to 47,000. As of today, we’re at 42,000, and we’re on our way down to 30,000. And so because we’ve taken that SKU count reduction out and improved the fundamentals of the operation, we believe we’re now at a point where we can take the next step, which is to go from unique supply chains into a single integrated supply chain. We think this is going to allow us to move from shipping less-than-truckload shipments in small quantities, enforcing our retailers to order from us 23 different ways and to the ability to order from us in a single way and ship full truckloads. And so from both a service and a cost standpoint, we think that this is going to be a major step forward for the company and really leverage the scale of Newell going forward.

Now when we kicked Project Ovid off, the supply chain constraints were not how they are today. And so we kicked the project off without that external backdrop in place. I think the team has done a pretty amazing job of keeping on track. And fortunately, we secured the two big new mixing distribution centers prior to the current supply-constrained dynamics. And so we’re monitoring it. We’re going to be prudent on the implementation dates that we go and make sure that we execute the transition with excellence. But if anything, the savings from the project have only gotten bigger as transportation costs have gotten bigger. So in fact, we think the project is likely going to generate more value to us today than when we first started the project nine months ago or 10 months ago.

Ravi Saligram — President and Chief Executive Officer

Chris, if I could add some context. Olivia, we have to think about sort of the new journey. I’ve been here two years, Chris close to three. And look, we’ve embarked on — we started it as a turnaround, but we’re really talking about a transformation of the company in terms of capabilities and looking at the long term while making sure that the short term is healthy. And so if you think about sort of the first year, we spent a lot of time on stabilizing the organization, getting the culture, revving up the people, bringing the team in the hybrid structure, etc.

Next, our next phase is all about innovation of our brands, about e-commerce and really getting the top line, which is why you’re seeing that momentum. The next one is really all about how do we get our gross margins up. And in addition to the pricing, the supply chain, whether it’s automation or Ovid, we think are critical because we have to be easier to do business with, with our customers. This has been going on for years and years. We have to make it easier for our size of the company. So with that — and then the next one is — will be international.

So all of this is about a journey of driving shareholder value. And we obviously manage very carefully the execution burden on our teams and make sure that we don’t slip up. But I think these have been managed to a good cadence, and we are very confident that all of these will go along quite well as we progress forward.

Olivia Tong — Raymond James — Analyst

Very helpful. Thanks. If I could just ask a follow-up on sales. So you mentioned this is the first quarter where every subsegment was below 2019. So do you think this is the right base now off of which to grow? Or were there any comp issues that make this not the right way to think about it?

And then just specifically, for Q4, the sales outlook assumes a pretty big deceleration on the two-year stack. So is this more the uncertainty of the environment or relative to success of recent pricing? Or is there something else that’s going into that?

Ravi Saligram — President and Chief Executive Officer

Yes. So let me just give a quick view on that, Olivia. First, 2019 is sort of a good way. We think about that as sort of pre-pandemic, and that serves as a good guide. But over time, that will change. So — but 2019 is a good base. So having said that, look, as we approach Q4, recognize a couple of things. One is that we’ve had a Baby business that has just been growing fantastically like in the teens and for all the reasons I mentioned in the prepared remarks. But one of the things that’s happened, the stimulus did end. And so — and without the huge rise in birth rates, there’s only so many how — and there’s a huge comp last year in the Q4, which is also very strong. So where — the Baby business is comping very high on Q4. So that clearly, we don’t have that. We still have Writing, which is growing in pretty well and so far the businesses.

So I think we shouldn’t get hung up about any particular part of our business because we’ve got puts and takes. The overall thing is, look, what we’re striving to do, Olivia, is to get to sustainable profitable growth over time. And I really think that we’re well on our way to do that.

Christopher Peterson — Chief Financial Officer & President, Business Operations

The only thing I would add to that, Olivia, is that last year, in Q4, there was Amazon Prime Day, which moved to Q2 of this year. And so we are in Q4, lapping the loss of Amazon Prime Day.

Olivia Tong — Raymond James — Analyst

Great. Thank you.

Operator

Your next question comes from Peter Grom with UBS.

Peter Grom — UBS — Analyst

Hey. Good morning, everyone.

Christopher Peterson — Chief Financial Officer & President, Business Operations

Good morning.

Peter Grom — UBS — Analyst

So I just wanted to ask around the phasing of margin progression as we think about next year. Because when I look at the guidance, you’re still kind of exiting this year with operating margins down north of 200 basis points year-over-year. And Chris, I totally understand the commentary that the pricing benefits and productivity will ramp in Q1. But is it still fair to assume that you think margins will be under pressure in the first half of the year?

And I guess kind of going back to Ravi’s initial comments around 2022 being the year of margin expansion, how should we think about your ability to hit your long-term target of 50 basis points for next year? Thanks.

Christopher Peterson — Chief Financial Officer & President, Business Operations

Yes. I think it’s — so thanks for the question. I think it’s premature for us to give quarterly guidance for next year. But what I would say is that we certainly believe that next year is going to be a year of margin growth for the company. And the reason for that is what I said earlier, which is a lot of the inflation impact that’s hit us this year, there’s a timing lag between pricing and inflation. And even if you look at the two business units that we have suffered the most inflation, which are Commercial and Food, we’re on LIFO accounting, which means in those businesses that the inflation hits us immediately in those businesses, and those have been the two biggest impacts.

So we’ve probably taken the big inflation impact from the move in resins already in the P&L. The lag in pricing creates a drag in the short term. But when we get into next year, we’re expecting the benefit of carryover pricing plus productivity to be higher than the inflation impact next year if based on our current forecast, which is based on spot rates going forward.

By the way, we’re also — as we think about the planning for next year, we are not assuming that inflation is going to be transitory. We are assuming that inflation is going to be significantly above normal next year, and we are building our plan, assuming that. And we are still confident despite that, that we are going to have significant margin growth next year

Ravi Saligram — President and Chief Executive Officer

And one quick add, and Chris did a great job of giving you a view on it. When we started this process on taking price increases on way back when, I think the whole world, including us, thought that inflation was going to be transitory. So sounds probably initial pricing moves were more on that because we felt, hey, there’s productivity and pricing. We may not have tried to cover it. Over time, as we’ve seen, this will become very realistic. And now our pricing posture is very clear. We are going to recoup inflation, and that stance will continue into 2022. And so I think that should give some reassurance on the margin front.

Peter Grom — UBS — Analyst

Great. Thank you.

Operator

Your next question comes from Chris Carey with Wells Fargo Securities.

Chris Carey — Wells Fargo Securities — Analyst

Hi. I guess it’s still morning, at least. So good morning. So just — I just wanted to follow-up on that pricing commentary, if I could. Pricing and productivity will be higher than your forecast for inflation next year, and you expect significant margin progression. So just — and when you say margin progression, you’re speaking about the full year, the cadence will grow over time. So this is more just a clarification question, and I have a follow-up.

Christopher Peterson — Chief Financial Officer & President, Business Operations

Yes. That’s right. I think it’s premature for us to give quarterly guidance for next year as we’re just in the middle of our budget plan. But for the full year, that’s what we’re expecting.

Chris Carey — Wells Fargo Securities — Analyst

Okay. All right. Thanks for that. And then it’s connected to the prior questions. But I guess, the — historically, a criticism or perhaps an observation of the business is that it’s quite disparate. Clearly, that’s improved with SKU rationalization and some businesses that have been sold. I guess with this Project Ovid, is the idea that these businesses can all actually make sense together to create a more scaled efficient platform or the — historically, this combination of an opco and a platform company come together, creating a more scaled organization that makes sense together over time? Or are there still going to be decisions that need to occur over time about pruning and improving the portfolio, which I suppose is always an observation but more in the context of the supply chain initiatives that you’re doing to try and create a more scaled organization of one, I suppose?

Christopher Peterson — Chief Financial Officer & President, Business Operations

Yes, I think that’s exactly the vision. And it’s well said in your question. If you look at our businesses, the eight businesses we have today, the place where we have a lot of commonality is in the top retailers. And so if you look at the top four retailers that the company does business with in the U.S., Walmart, Target, Amazon and Costco, those top four retailers are pretty consistent across every one of our business units. And the thing that’s good about that is that’s why this integrated supply chain network makes a lot of sense because we’re shipping to the same customers, the same locations. And instead of forcing those retailers to give us 23 separate orders and then we ship from 23 locations and we have 23 invoices and we’re shipping 23 small less-than-truckload shipments, if we can have them give us one order on one set of terms and ship on full truck, that is a huge efficiency for both us and for the retailer. And I think it allows us to create a competitive advantage versus many of our subscale competitors. So that’s largely the thinking behind that.

On the portfolio pruning point, I think we’ve been pretty consistent there, which is we think we’ve got strong organic growth opportunities in both top and bottom line in each of our business units. It doesn’t mean that we’re not going to do some portfolio moves in the future but we’re likely going to be more on the tuck-in or acquisition or tuck-out divestiture side. But we’re going to be driven by shareholder value creation as we think about any portfolio moves.

Ravi Saligram — President and Chief Executive Officer

One connection that, look, as we think about it and the pandemic has helped that really Newell is all about the home, both indoors and outdoors, and products really cater to that. And so whether it is the mom, whether it is the kitchen, there’s a lot of connections. And we’re just not in the past, that’s more for holding company approach. Now we’re really integrating the back investor set but also the front, where you’ll see us do more connections between our brands, more promotional opportunities because we think that there’s a lot of connections, which we have just not exploited. And I think we’re going to do that as we become more and more mature on the turnaround and go forward.

Chris Carey — Wells Fargo Securities — Analyst

Okay. Thanks so much.

Operator

Your next question comes from Kevin Grundy with Jefferies.

Kevin Grundy — Jefferies — Analyst

Great. Thanks. Good morning, everyone. Two for me this morning, if I may. The first one on Ovid for Chris. Can you comment now on the margin and working capital opportunity there, but particularly within the context of what you’ve already outlined, Chris? So that would be the gross margin benchmarks and the overhead benchmarks, which in aggregate, are some 500 to 700 basis points of opportunity. Can you just comment on will Ovid be incremental to that? Or do you see it more as an accelerant to reaching those targets over time? So that’s the first question.

And then just the second question. I didn’t hear any commentary, I guess, on share repurchases. I think you guys have kind of left the door open that in the past. I think your updated thoughts to the Board’s kind of updated thoughts there. And whether, Chris, the small suite to your capital structure target now down to 2.5 from 3, if that changes your thinking at all with respect to returning cash to shareholders. So thank you for both of those.

Christopher Peterson — Chief Financial Officer & President, Business Operations

Very good. Thanks, Kevin. So on Ovid, certainly, we expect Ovid to be a significant contributor to gross margin improvement. I think that we view it not incremental to the 37, 38 target that we had put out previously. I think we view it as a building block to getting to that target over time. On the overhead part, we do not expect Ovid to have a material impact on overhead. What I will say is that embedded in this year’s guidance is a pretty significant overhead investment that we’ve made in the team and consulting costs, etc., for the Ovid project, but that’s already embedded in our existing guidance. And when we actually complete the project, that cost will come out. And so eventually, that sort of above going cost that we’ve got built in this year on overhead is likely to go away as we get to 2023.

On the share repurchase question, just to be clear, as I mentioned in the prepared remarks, we retired about EUR300 million of debt in Q3. In Q4, we’ve called our June 22 notes of $250 million, which we expect to retire in Q4 of this year. From — as we go into next year, we do not expect any more reduction in the level of our gross debt. And we think that, as we move into next year, we are going to move to our leverage target through EBITDA growth not through debt reduction. And as a result, we think that as we move into next year, it’s going to open up the opportunity for share repurchase as we expect to generate more than enough cash to cover investment in the business and the dividends fully. And so we are moving into a period next year where the capital allocation begins to get freed up.

Kevin Grundy — Jefferies — Analyst

Very good. Very clear. Thank you, guys. Good luck.

Operator

The final question comes from Lauren Lieberman with Barclays.

Lauren Lieberman — Barclays — Analyst

Great. Thank you. I just had one question on your relative competitive positioning because I think the fact that you were so forward thinking in building inventory ahead of the holiday season, knowing what you know about the length of your supply chain and ocean freight, etc., etc., I was just curious how your in-stock positions are comparing in key categories to competitors. I know market share is a very tough thing to measure in a lot of your businesses. But just even, qualitatively, how would you describe that environment, the degree to which you’re picking up, whether it’s share or it’s already enhancing your relationship with retailers because of your service levels during the upcoming holiday season? Thanks.

Ravi Saligram — President and Chief Executive Officer

Hi, Lauren. I think let me give that a shot. I think it really varies. It’s not a one-size-fits-all because despite building up the inventory, some of the businesses where we’re importing that has an impact. But I’ll just tell you on shares, the Writing business, as I mentioned, really a big winner on the share front not just in pens but overall. We think throughout the year this year on a year-to-date basis, the candle business, I’d hate to use the word saying it’s been on fire, but it’s been doing amazingly well. And we do believe that we’re making a lot of traction in the Baby business. We’ve been gaining share. So I think we’ve got different businesses where we are gaining share. But there are some businesses where the demand has been so high and unexpected that — and also it depends on the price points we played out. Like in appliances, while we’ve had terrific growth, we operate more on the opening price points. And so there were — so on a dollar basis, even though we’ve had good growth, we may not be seeing the share improvement. So I think it varies.

Outdoor, where we bring stuff — I mean, we’re really pleased to see the good growth that is happening. And I think we’re beginning to really get supply right. We had some issues during July, August, but I think we’re now back on track there. And the Outdoor, the beverage side, especially, we’re getting back on track. So I think it varies.

Our Food business, some of the demand has been so high on things like Ball. Certainly, that has been a challenge for us. And — but Ball, that is really the very — it’s got such a dominant share of that business. So that’s sort of — that has been complicated for us from lids, bottles, et. So it varies and — but let’s put it this way, everything we can do to maximize the top line opportunity, we’re doing, working in close collaboration with our customers. But it’s been tough on service levels because I wish our service levels were better. But every competitor today, I think, is wishing there be better.

So I can’t say it’s nirvana, but I do think that we’re doing our best. And I really feel the one thing I can tell you, Lauren, our brands are in a better shape and rejuvenated far better today than they were. And I know one of your favorite businesses of ours is Baby. I’ll tell you about — you didn’t ask me, but I’ll tell you because you usually asked about our baby innovation. So I’m very excited about the Baby Jogger City Turn, where you can turn the car seat to how the baby face you. Now I wish I had grandkids. My daughter is going to get married. So hopefully, I can start using this someday, but that — and the city turn strollers. So I think Baby Jogger, we’re doing a lot to rejuvenate that business. So look, brands are in good shape. So we’ll get the top line and the share where we can.

Lauren Lieberman — Barclays — Analyst

That’s great. Thank you for such a thorough and candid answer. Have a great, weekend.

Christopher Peterson — Chief Financial Officer & President, Business Operations

You too, Lauren.

Ravi Saligram — President and Chief Executive Officer

Thank you, Lauren.

Operator

[Operator Closing Remarks]

We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.