Good morning, and welcome to Newell Brands’ Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will then open up the call for questions. In order to stay within the time scheduled for the call, please limit yourself to one question during the Q&A.

As a reminder, today’s conference is being recorded. A live webcast of this call is available at ir.newellbrands.com. I will now turn the call over to Nancy O’Donnell, Senior Vice President of Investor Relations. Ms. O’Donnell, you may begin..

Thank you. Good morning, everyone. Welcome to Newell Brands’ third quarter earnings call. On the line 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.

I refer you to the cautionary language and risk factors available in our press release and our forms 10-K and 10-Q for a further discussion of 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 reconciliations between GAAP and non-GAAP measures can be found in today’s earnings release and tables as well as on the Newell’s Investor Relations website. Thank you, and now I’ll turn the call over to Ravi..

first, driving consistent top line growth. I suspect we may see choppiness from quarter-to-quarter in the near-term as each business in a different stage of the journey, we change demand searches, surges in select growth categories and the effect of the pandemic are varying based on categories.

I truly believe we are beginning to turn the corner as a company. Secondly, we continue to drive and invest behind consumer relevant, customer supported innovation with an eye to its market share gains across our key brands.

Third, our e-commerce will continue to be our big bet, and I'm confident Newell will build a strong reputation with consumers and customers for omnichannel pros. Fourth, we will accelerate our efforts to drive out complexity while maintaining tight control of our costs, fueling productivity and reducing SKUs.

We're proactively working on optimizing our supply chain network to deliver excellent service for our customers and improve OTIF. And last but not least, we will continue to make cash flow, a hallmark of our company. In 2019, we generated over $1 billion in operating cash flow. In 2020, we hope to give an encore performance.

In fact, even do better and exceed $1 billion. Chris, for whom I formerly called $1 billion man, will fill you in shortly on the details. The credit for our strong Q3 results goes to our leaders, our brand and marketing and sales teams, our supply chain professionals.

Most importantly, a real thank you and shout out to our frontline employees in the factories, DCs, retail stores and R&D labs for their dedication. You keep us going and you're our heroes. And to all our receivable collectors, thank you for bringing in the cash. I am so thrilled to see the teamwork, dedication and engagement of our people.

With all the foundational work done to-date, not only enabling us to overcome the challenges posed by COVID-19 but also positioning Newell Brands for sustainable, long-term success. I truly believe the best days for Newell are ahead of us, onwards and upwards. And at this point, over to you, Chris..

Thanks, Ravi, and good morning, everyone. Before going through the details of the quarter, I want to provide some operational highlights. When we put our turnaround plan together 1.5 years ago, we created an integrated set of strategies and initiatives designed to strengthen the company and accelerate financial performance.

We have made very strong progress on each area of the plan and taken together, the strategies are playing out in a very powerful way. In fact, the momentum is accelerating. Ravi shared a number of the improvements we have made to strengthen the organization and return the company to core sales growth.

In addition, we have made significant improvements on operating margins, cash generation and reducing complexity. On complexity reduction, for example, we eliminated another approximately 10,000 SKUs during this quarter, which is a year-to-date reduction of 23% or more than 40% reduction since we began the program about two years ago.

We've now put in place a systemic monthly process to drive SKU reduction and efficiency on an ongoing basis. We are quite encouraged by both the progress we have made and the opportunity still ahead of us, including the efficiencies it unlocks across the organization.

Every business unit has plans in place to take more aggressive actions on SKU rationalization as we move into 2021. We also made a significant dent in reducing excess and obsolete inventory during the third quarter, taking advantage of strong consumer demand dynamics.

As a result, the quality of our inventory is in the best shape the company has been in recent history. Operating margin expansion was another highlight of the quarter. We are laser-focused on optimizing our cost structure and unlocking the full margin potential of the business.

Fuel productivity momentum continued to build on the success from the first half of the year. We drove savings from productivity that were more than 50% ahead of the year ago level, which in combination with overhead savings helped to mitigate the impact of unfavorable mix due to the writing business decline.

For the full year, similarly to Q3, we expect gross fuel savings to contribute roughly a 4% reduction to our cost of goods sold base, which is the best annual result the company has delivered since we started tracking the measure.

We have significantly strengthened our productivity performance over the past few years with visibility to a very robust funnel of projects for next year. We have come a long way in establishing and embracing a culture of productivity throughout the organization as everyone aligns around our common goal of driving efficiencies and simplification.

We also made very strong progress on overhead cost reduction. We successfully converted the Coleman North America business to SAP on October 1st, continuing our rationalization of ERP systems. We further simplified our IT footprint and have now reduced the number of IT applications from about 6,000 a few years ago to less than 800 today.

We largely completed the headcount portion of the restructuring program that we implemented during the second quarter, which impacted about 4% of the company's professional employees.

And we implemented a new technology to consolidate and better control the company's indirect overhead spending, which we expect to drive significant savings going forward. We reported outstanding quarterly and year-to-date results and cash flow generation, driven by strong working capital progress.

In Q3, we actually generated slightly more operating cash flow than we did during all of 2018. I'll now recap some of the financial result details. Third quarter net sales increased 5.1% year-over-year to $2.7 billion as core sales grew 7.2% and currency was unfavorable by about one point.

Growth was broad-based to seven or eight business units grew core sales, as did all four geographic regions. Normalized gross margin was 33.9%, a 90 basis point contraction versus prior year, and a strong productivity savings were more than offset by business unit mix, COVID related costs and inflation.

Normalized operating margin of 14.9% was an improvement of more than 200 basis points versus last year, driven largely by overhead cost savings. Net interest expense declined by $4 million versus last year, reflecting progress on debt reduction.

We recorded a normalized tax benefit of 7% as compared to a benefit of 22% a year ago as we realized discrete tax benefits in both periods. Normalized diluted earnings per share were $0.84. Core sales for the Appliance & Cookware segment grew 17%, reflecting strong consumption across all regions, particularly in Latin America.

Core sales for the Commercial Solutions segment grew 13.3%, driven by strong demand for sanitizing, washroom, hand protection and organization products. Core sales for the Home Solutions segment grew 19.5%.

The Food business continued its impressive momentum as the increase in at-home consumption of meals translated into heightened demand for food storage, vacuum sealing and fresh preserving products.

Home Fragrance core sales returned to strong growth this quarter as well with our factory closure behind us and the reopening of most specialty retailers, including our own Yankee Candle retail stores. The Outdoor & Rec segment generated core sales growth of 8.

1% as the outdoor categories benefited from consumers' preference for vacation and close-to-home and spending time outdoors. The strong Q3 result also benefited from an acceleration of sales related to the implementation of SAP at Coleman North America on October 1.

This impact will reverse and become a drag on top line growth for the Outdoor & Recreation segment in Q4. The Learning and Development segment was the only one that experienced top line softness in Q3 as core sales declined 9.5%, reflecting expected challenges in the writing business as a result of delayed reopening of schools and offices.

Baby rebounded back to core sales growth driven by healthy consumption. We continued to drive very strong momentum in operating cash flow during Q3.

Year-to-date cash flow from operations of $820 million almost doubled versus last year, as the cash conversion cycle improved by about 30 days as the organization rally behind initiatives to reduce complexity and free up cash from working capital.

While we are making progress across every facet of working capital, the biggest driver of year-to-date improvement is accounts payable, driven by more favorable payment terms following our negotiations with suppliers.

We ended Q3 in a lower than anticipated inventory position as SKU rationalization, stronger than anticipated sales in Q3 and a more efficient demand planning process drove our inventories down. And we continue to make progress on receivable collections through operational improvements. We remain in a very strong liquidity position.

As a result of very strong operating cash flow generation, we ended Q3 with cash and cash equivalents of $858 million. We repaid a $305 million bond maturity in August bringing the company's net debt balance down to $5.0 billion, a $500 million reduction compared with the end of the second quarter.

Our credit revolver and AR securitization facilities are currently undrawn and fully available. We delivered a significant improvement in the company's net debt to normalized EBITDA leverage ratio in Q3 driven by both net debt reduction and EBITDA growth.

Specifically, Newell ended Q3 with a ratio of 3.9x as compared with 4.6x at the end of the second quarter. Now let me turn to guidance. To help improve financial transparency, we are reinstituting the practice of providing guidance as forecast visibility has improved in recent months.

Our guidance ranges will be wider than what we have historically provided, given the dynamic environment and uncertainty around the pandemic. We expect to deliver flat to low single-digit core sales growth in Q4. Thus far, in October, consumption has remained strong.

We expect sustained progress on productivity and overhead savings to be more than offset by unfavorable business unit mix and higher A&P investment so that normalized operating margin will contract 80 to 140 basis points year-over-year to a range of 9.9% to 10.5%.

Our guidance implies that the second half of the year will be much stronger than the first half, both in terms of top line growth and margin delivery. The tax rate is projected to be about 0 in Q4 due to the expected tax benefits, discrete tax benefits.

And we are guiding to normalized EPS in Q4 in the range of $0.40 to $0.46, and this brings our guidance for normalized EPS for the full year to a range of $1.60 to $1.69.

We expect to generate full year operating cash flow of $1.1 billion to $1.2 billion which will mark 2020 as the second year when the company's free cash flow productivity will exceed 100%. This compares favorably to the initial cash flow outlook we shared with our Q4, 2019 results despite the fact that the world has changed dramatically.

It is a testament to the meaningful progress we are making on our turnaround agenda and the resilience of our people who have come together to overcome the challenges presented by the pandemic. Turning to 2021, while we are just starting the planning process, I want to share some preliminary perspective of how we are viewing next year.

We expect to continue to make strong progress against each of our strategic priorities. We expect sustained efforts behind productivity and cost optimization to drive margin improvement, a portion of which is expected to be reinvested behind brand support, and we expect to continue to reduce the cash conversion cycle next year.

While we are not providing quantitative guidance for 2021 at this time, our long-term model calls for low single-digit core sales growth 50 basis points of annual operating margin expansion and free cash flow productivity in excess of 100%. We will share more perspective surrounding 2021 during our normal schedule of the Q4 earnings call in February.

In closing, we are very encouraged by the progress we are driving through the turnaround plan. We will remain agile and nimble, so that we can quickly adapt to the dynamic environment we're operating in, while simultaneously propelling the organization forward on its turnaround journey. Operator, let's open up the Q&A session..

[Operator Instructions] We'll take our first question from Steve Powers from Deutsche Bank..

Hey thanks so much guys. And Ravi, I feel like you're so animated. I feel like I wanted to jump on to the phone and give you a high. So congratulations on the call..

I'll give you a virtual hug, Steve..

Perfect. Perfect.

I guess as I think about the pivot to the fourth quarter and the outlook, Chris, that you just talked through, I guess, how are you thinking about holiday consumption and the potential that some of your categories, some of the at-home demand might have been pulled forward earlier – at-home demand that you might see at the holidays gets pulled forward earlier just because people are spending some much time at home.

You mentioned strong October consumption, but I'm wondering if you built in allowances for some of that consumption waning as the quarter progresses. And if you could make some commentary on what you expect at a Yankee, specifically this holiday season because that's just such an important category in the fourth quarter for you guys.

I'm just curious, given the channel dynamics, how you expect that to play out? Thanks so much..

So let me quick and kick it off, and then I think Chris can also add some perspectives. So I think all of the pundits have been saying that this year, holiday will start a little earlier. And so perhaps, when we look at Q3, right, because to look at Q4, you've got to look at Q3.

A lot of our production was closed in Q2, so we opened it up, and we've been chasing demand. The good news is consumption has been leading sales, which is a very positive thing. And so I think that – and as I mentioned, for Yankee Candle, in particular, we didn't even get a chance to do much prebuilding because we were closed in our factory.

And that's been chasing. So far in October, consumption looks pretty positive. And we just got this week to just today. And it looks positive. So our – what we guided for Q4 sort of a holistic view when we look at everything. Look, we've got some increased A&P spend in Q4. E-commerce is continuing to do great. Amazon, we had a great Prime Day in October.

So – and Yankee Candle, I think the big issue there is just chasing demand. So overall, I think we've given our best view of where Q4 is on a holistic basis.

And so Chris, do you want to add anything to that?.

I think you've said it very well, Ravi.

The only thing I would add is that the underlying fundamentals that are driving consumer demand, we think are likely to continue and sustain for some time because we don't see a slowdown in at-home behavior or increased focus on sanitization and cleaning and those trends, which are driving consumer demand across a broad section of the company's categories, we think are likely to sustain for some period of time..

That's great. I'm sure there are a lot of questions in the queue, so I'll pass it on. But I will say, Nancy, thanks for all your help and congratulations on your next phase. And Sofya, congratulations to you as well. Thanks so much..

Thanks, Steve..

Thanks, Steve..

Thank you. Our next question will be from Lauren Lieberman from Barclays..

Hi. I wanted to go first. I don't think Steve attended to get at it. But I'm still just a little bit perplexed on why you guys are seem to be expecting or forecasting so much deceleration sequentially. The commentary that October remains strong.

At our conference, when you spoke to core sales growth performance in the majority of your business, there was no sense that it was up that much, but it was up. So I'm just curious what your kind of speaking in or thinking about in terms of November and December, that there's such a significant implied deceleration in sales growth? Thanks..

Yes. Thanks, Lauren. Let me try to provide a little bit of color on that. So first of all, as Ravi mentioned, we're very excited that we've got the company back to core sales growth. And we think we have turned the corner on getting the company to consistent delivery of core sales growth.

If you look specifically at Q3, there were 3 things that benefited the core sales number in Q3 that won't repeat or are unlikely to repeat in Q4. So one was the SAP implementation that we talked about on Coleman North America, where we pre-shipped to be prudent in advance of that SAP implementation in Q3 that helped Q3 and will be a drag on Q4.

The second was the shift to Prime Day from June of last year to October, and those Prime Day shipments, we shipped out in the third quarter. And then the third was some of the replenishment of retail inventories as our supply chain recovered significantly during Q3 versus where we were in Q2.

We estimate the total impact of all of those things as maybe a couple of points that Q3 benefited from. And we don't -- that we don't see repeating in Q4. That being said, the consumption trends remain very positive across the majority of our businesses, and so that's why we're guiding to Q4 growth at the level that we're guiding it to in Q4..

I'll just add a couple of quick things there, Lauren. Look, if we can sustain at those rates, that's our longer term aspirational model. And people -- how soon they forget, this has been a company that's been declining for so long. So, we actually think that the fact we can continue to grow is a positive thing.

There are a few things specifics I just want to mention. But we're gaining share. In previous quarters, I talked about food, but now we're gaining in other businesses as well. Like outdoor camping, et cetera. Second, recognize that when you go into Q4, you have a bit of seasonality because outdoor starts slowing down.

And in Q3, outdoor for the reasons Chris mentioned, there was a real bump up on the camping side. But the tech apparel side is still a laggard and having -- continues to have challenges. As is our whole beverage business, Contigo, et cetera, that’s more because people are not on the go.

So, whereas, the Coleman business was able to offset things in Q3, you don't have as much going into Q4. So I think the seasonality is something to take into account on that. And then we're chasing demand. So a lot depends on which is a great thing to have, as I already mentioned on Home Fragrance.

So all-in-all, we still -- we feel, look, if we can continue to – every quarter, get some growth, this will change the complexion of the company..

Yes. Okay. That's really helpful. And I definitely remember that it's so long that it's been since there was this kind of growth.

I guess another question I had though that I've really been curious about is in addition to, I guess, a lot of the work that's gone on this year, all the things you went through on the call, right, the complexity, building up e-commerce capabilities, quality of content and the distribution opportunities.

I'm curious what's kind of been going on in the background. This was -- originally, this was the core reset year, which implied more work to get is closer to consumers, again, not just about innovation process, but actually getting closer to output in terms of innovation.

So what can you share with us on where that stands as you look ahead into 2021 and think about the innovation pipeline, anything that you can share, whether it's qualitative or as broad as it needs to be. But I'm curious about the progress made on that front during this year..

Yes. I'll quickly hit that, Lauren, a few things, right? This was -- yes, the recent – the most important thing in my opinion that has occurred is, we formed a leadership team. My leadership team with the exception of the e-commerce guru that we and Chris are trying to bring in is complete, and we have some terrific leaders.

So Chris had articulated a great turnaround plan when he joined. And then when I came, but you also needed people to execute it. And we now have the right people who are both consumer-focused and efficiency-focused who are beginning to execute. Specifically on the innovation side, look, some of these things, it's going to be a marathon, not a sprint.

It's not like next year only, you'll have breakthroughs coming through. But we are doing little things that are beginning to give the organization confidence like that ice coffee maker. That was a bit of a sleeper. We looked at it and said, hey, it's exciting. And then, yes, the consumer trends for COVID has helped because people have loved this thing.

There are similar things like our whole sanitizer project and the washroom thing. Look, we've sold 1 million dispensers in the commercial business in third quarter. That's incredible. So I think you will see that. We're also partnering with 2 firms outside to build our innovation muscle to very leading firms to help us with innovation.

But the important thing is our leaders have a consumer customer-focused mindset. So they're going and saying, let us understand trends and make it durable. So I feel pretty comfortable that over time, you'll keep seeing this innovation stream.

It will not be like, hey, next year, everything were part because these things take time to hit the line reviews, you've got to develop it, and you've got to make sure the margins are okay. But long term, I feel very good.

My vision for this company is to restore it to 1994, when Rubbermaid was number one on Fortune's Most Admired list, why? Because they put out in innovation every day. That's why I want us to get to..

Thank you so much very helpful..

Our next question will be from Bill Chappel with Truist Securities..

Thanks good morning..

Good morning Bill. .

I guess, first, Nancy, congratulations. Sofia, congratulations. Nancy, it's been an extraordinary 10 years. So hopefully, you can have a little more rest as you finish this chapter.

Going back to the -- looking to the fourth quarter, kind of any reads you got out of Amazon Prime Day in terms of -- for Prime Days in terms of continued demand for home products, continued – I know it's typically, Amazon Prime days have been kind of a focus of the company on all the different categories.

So just anything that tells you for the upcoming holiday season would be interesting?.

I think we got a terrific lift and it's really across many of the categories that are growing, but also we're continuing to see those trends, so I think a lot of some of the trends that we saw in that quarter were also reflected on Amazon Prime Day.

But Chris, are there any other specifics you want to add?.

Yes. I would just add a couple of other thoughts. So we were up double digits on Prime Day this year versus Prime Day last year, even though it occurred at a different time during the year. So we grew share during Prime Day, and we're broadly growing share on Amazon. And post-Prime Day, we've continued to see strong consumption trends.

So the consumption trends we've share that we're seeing weekly in October, had a big bump from Prime Day, but not -- they did not -- we did not see any slowdown post-Prime day..

Got it. Yes, that helps. And then second, just as I look at the learning category, certainly impressive with all the kids going virtually.

But kind of what's your outlook as you move to the fourth quarter and early next year in terms of are you seeing -- has that category bottomed out in the third quarter? Will it remain pretty weak for the next few months? Just trying to understand kind of what you're seeing on a sell-through basis..

Let me quickly hit some quick things. As we said in the prepared remarks, we expect it to remain challenged in Q4. And there's been elongated season. So -- but I think, look, trade inventories -- the replenishment is not going to be as much. So, we want to be careful on that.

I think -- the good news is consumption continues to be where we're seeing some growth. But it is, look, with the hybrid models, and even so -- even with the hybrid, most of it is online, it is a bit of a challenge, but we see pockets of strength.

The whole Sharpie S-Gel, where just in the gel category, 900 bps share increase, three percentage point increases of pens as a whole. Our DYMO business is doing very well, both internationally and in the U.S. So, I think current situation is I think it's going to be the same. The key thing is really the pandemic has to be over.

But what we're preparing for is, look, if some of these trends of hybrids remain how do we reimagine some of our products and stuff. So, we've got great innovation drive on it. I think this is a terrific business, I think will continue to be strong once we come out of a pandemic..

Let me just add one other point, which is we've made a decision to proactively pull back on shipments into the trade on the writing category during Q4 because we want to end Q4 with our retail inventories in a good position. And so our guidance does reflect a pullback and writing sell into the trade.

And what we're seeing, as Ravi mentioned, from heightened consumption, we expect to get our retail inventories in a good position heading into next year..

That's great color. Thanks so much..

Thank you. Our next question will be from Joe Altobello from Raymond James..

Thanks guys. Good morning. Just want to follow-up on that last point. You guys made about replenishment. I think it was a nine-point delta if memory serves between POS and core sales in the first half and while there was, as you mentioned, some replenishment that happened in Q3.

I would think you didn't completely close that gap, so why wouldn't there be the potential for more inventory replenishment going forward outside of the writing category?.

Yes. So, the way to think about that, Joe, is that during July and August, we saw a very significant reduction in POS trends because the back-to-school season, which in the prior year happened fully didn't happen fully this year. What happened in September and October so far is we're seeing POS trends that are actually ahead of a year ago.

But the area under the curve in September and October is not as big as the area lost in July and August. So, the retail inventories are still higher than what we would typically see at this time.

That's why I made the comment on Bill's question that we've decided we're going to pull back on proactive shipments into the trade in Q4, and that's fully reflected in our guidance, so that we end the year with a -- the retail inventories in a strong position..

Got it. Okay. That's very helpful, Chris. And just second question. As we think about our models for 2021, your normalized tax rate this year, I think was about zero or it's going to be about zero.

So what tax rate should we be using for next year?.

Yes. So, the way I think about our tax rate, and, obviously, I'm not going to comment on any outcome related to the election that could change that. But in a stable environment, our going tax rate is probably close to 20% at this point, excluding discrete tax items.

We, as a company, still have a significant opportunity ahead of us on discrete tax items.

Because of the number of legal entities, because of the M&A activity that's happened historically, we're not going to provide specific color, but I would say, a 20% rate is sort of a going rate, but I expect that in every year for the foreseeable future, we're going to have discrete items that would take that number down from there, and we'll provide more specificity on that on the next call..

Okay, great. Thank you, guys..

Thank you. Our next question will be from Wendy Nicholson from Citi..

Hi. Good morning. My question actually has to do with the margin. And specifically, the operating margin improvement in the quarter was so much better than I was expecting. And, I guess, there are two components I want to ask about. First, Home Solutions, the margin expansion was fantastic.

And I'm wondering how much of that is structural, maybe to some of the changes you're making in the Yankee model versus just favorable operating leverage on the food side.

So, number one, how much of that is kind of here to stay? And then, just as I think about the negative mix in the business, your highest margin business, the Learning business was so weak in the quarter. That has to have been a huge margin headwind.

So as I look out towards next year, assuming that business normalizes, you've got an incredibly easy comp, it's hard for me not to get really excited about what kind of margin you could put up potentially in the back half of next year.

Is that fair in terms of how much I'm thinking about margin expansion being a real part of the story now, or am I getting too excited, like Ravi?.

Let me try to provide some color on both topics. So, on Home Solutions, there's no question that food was a bigger driver of the margin gain versus the Home Fragrance business. Although, the Home Fragrance business also had margin improvement. I think, the way to think about that is, we do believe it's structural.

I don't think that -- given the big jump up in margins in that Home Solutions segment, I don't think we're going to see that type of annual jump up, but I do believe that, that higher-margin is sustainable in that business going forward. And we're getting effectively the benefit of a lot of different elements that are driving it.

Strong top line growth, which is giving us volume leverage, strong productivity savings and overhead leverage are all contributing in that. On the question on margin dynamics, let me provide a little bit more detail this year and then talk next year.

So, this year, really, the story is, the productivity fuel savings on gross margin are effectively offsetting the COVID cost and inflation, which is a strong result. And then the reason that gross margins are down is really due to the business unit mix.

So you're right that when the writing business bounces back, we should get a corresponding mix benefit that should allow us to recapture that. And we're optimistic about that. When -- as the pandemic starts to ease and offices reopen and schools return, when that happens. The other thing that's happening on margins is the overhead cost savings.

And that, we believe we're making structural improvements that should continue to carry through to the margin story. So we're optimistic about margin prospects for this business over the long-term. Obviously, we're not in a position today to provide specific guidance for 2021, but we'll plan to do that on the Q4 call..

Fair enough.

Yes?.

Wendy, just a quick thing. And I'd love to be as excited as you. But I think, look, that's why we've provided this evergreen or longer-term aspirational model of 50 bps improvement, and it gives us confidence. I think keep in mind, we also took out a big chunk of overhead this year, so that we'll be lapping some of that.

So it's not going to be continuous. But the long-term model is the one. And the most important takeaway for me actually is what Q3 showed is we can withstand the shock of the writing business because a lot of people are very concerned. And I think that portfolio strength is the one that one should get excited about..

Fair enough.

And did you quantify COVID costs in the third quarter versus second quarter and what you're expecting for the fourth?.

We have not quantified it. But what I would say is that what we I'll provide a little bit more color. We quantified that we're expecting our fuel productivity savings to take out about 4% of cost of goods this year. And that's effectively offsetting COVID cost and inflation.

And if you look at the gross margin impact of COVID cost and inflation, they're roughly equal to each other..

Great. Okay, thanks so much. Congratulations..

Thanks..

Your next question will be from Andrea Teixeira from JPMorgan..

Yeah. Thank you, good morning. And congrats, Nancy, and Sofia. Thank you Nancy for all the help and wish you well. I wanted to ask more on the working capital control, which obviously has been one of the key highlights.

And as part of what Chris was commenting about reducing the retail inventory, is there anything -- does it have anything to do with the consolidation of retail and the shift online? I'm assuming you're keeping your receivables tight at this point.

So I wanted to ask if that's something you considered in your Q4 guidance? And also, if I can squeeze a clarification on the price/mix and reinvestment comments you made. So I'm assuming the mix has been positive. I mean, granted that, obviously, the writing segment has been a drag.

But with Prime Day and accretive innovation, are you -- what type of investment are you planning to do? Is that more digital advertisement or has to do also with couponing to support innovation?.

Okay. Let me start on the working capital piece.

So certainly, the consolidation of -- or the shift in the retail dynamics we are seeing and we believe it's a positive for our portfolio because what's happening is – and Ravi, I think, mentioned this in his prepared remarks, that at the e-commerce channel and the mass channel are growing at double-digit rates for us.

And the department and specialty channel is declining. And so the proportion of our business that are in the winning retailers is going up. And we believe that, that sets us up for stronger growth going forward.

That dynamic doesn't really change our working capital because we're – the working capital doesn't – for us isn't really driven by consolidation of retail. The thing that's driving working capital change for us are the elements of negotiating extensions in our payment terms with suppliers.

Accounts payable was the biggest contributor to working capital in the year-to-date period. Also, the SKU count reduction and the demand forecasting process that we put in place is allowing us to significantly reduce inventory levels. Those were the two primary drivers.

And then with regard to the pricing mix advertising, we are planning in Q4 to have higher advertising spend versus a year ago. Some of that is due to Prime Day being in Q4. And most of that advertising spend that we're planning to be up in Q4 versus year ago is digital and in nature and e-commerce focused..

That's helpful. No coupon, you would think, right? No major kind of pricing reinvestment..

Yes. We're not seeing a big change in promotional environment of significance to talk about..

Great, Chris. Thank you..

Thank you. Our next question will be from Kevin Grundy with Jefferies..

Great. Thanks. Good morning, everyone. And just to echo the sentiment, Nancy, Sofya, congrats and Ravi, Chris, congrats on your team with continued progress. Two quick ones. Actually, the first one is a quick one. Just a housekeeping one for Chris, and I apologize if I missed this. You mentioned POS remains very positive.

What was the POS in the quarter? What's it trending in October? I think it'd be sort of helpful to compare that to the flat to low single-digit core sales guidance for 4Q. And then, Ravi, just to pick up on the writing piece. So you commented on, obviously, the near-term uncertainty related to the pandemic.

My question is sort of broader so you said you feel good about it. Chris, you mentioned you expected to bounce back. I think folks would agree with that given the easy comp.

But my question is really beyond 2021, can you address, Ravi, the longer-term debate around the ability to grow that business, given the wider adoption in schools, the chromebooks, the laptops, I see it in my own household, et cetera.

What would you say to the skeptics that have been calling for the demise of the pen, why doesn't this industry go the way of greeting cards? Maybe you can frame that in sort of the building blocks here to get people comfortable around household penetration, frequency of use, et cetera, particularly with the latter likely under pressure even beyond the pandemic? So, thanks for that..

So very quickly, on consumption, we've not actually given out the numbers, but let's just put it this way. We've been chasing, and we're continuing to chase, so that should tell you something that our consumption is always – so far, what we've seen is it's higher than our sales. And so in October, consumption continues to be up.

So let me go to the writing piece. Look, I think I have two perspectives, right? One, as a retailer, organizing officer facts. So we looked at all the categories and stuff. And even at that time, this business was strong.

People talk about, gee, the death of the pen, but look, when you keep writing, there is something so personal about the pen, that people continue to use it. And even during these times, we're seeing improvements. I think, though, we should look at writing and learning as a bigger thing than just pens or pencils.

Yeah, we've got something like DYMO, which is technologically based. We're looking at a lot of IoT innovations there. And labeling, for instance, I mean, DYMO up because of all the packaging that's going out right now online, and small businesses use this product like crazy. So there's tremendous growth there. So that's a great focus for us.

And things like slime, it had a pay day. It softened during the pandemic, a little bit of bump, but then it sort of flattened out. We're going to continuously look at innovations for children's activities to take -- if there is stay at home, how you leverage that trend.

That's why we're putting a lot of innovation efforts, rather than banging our heads in the sand and saying everything will come back. We're actually proactively saying, if the world changes, let us get ahead of it. We've got very strong brands. And the innovation of putting Sharpie in a pen, right, itself is indicative of that.

So we've got tremendous brands. We will just keep looking at digitizing the business and looking at the environment. So I continue to feel that this is going to just be a powerhouse of a business, temporary right now with the pandemic, but will come out stronger..

So, Ravi, fair to say that you're planning for growth beyond 2021.

It sounds like the push is going to be on innovation, probably understanding some pressure on pens, but you talk about DYMO and Sharpie, et cetera, internal planning, like on a three to five-year basis is, you think you can grow the business, just to be clear?.

This is going to be a very important part of our business, at least for the next several years, I have full confidence in it. And we have a terrific management team, by the way, on this business..

Okay. Very good. Thanks, Ravi. I’ll leave it there. Good luck..

Thank you. I think we’ll have our last question..

Yes. Our last question will be from Olivia Tong from Bank of America..

Great. Thanks. Good morning. Congrats on the results and congrats on [Indiscernible] as well on your respective roles. I wanted to ask a little bit about your expectations on the growth trajectory for your at-home category. So now lo and behold, we have to think about comping some of these growth rates next year.

So I'm curious how you think about the future, because obviously, household penetration is up dramatically, but presumably, you see there's more opportunities.

And given new management and presumably steadier stewardship of these businesses going forward, should we expect growth in your at-home categories to continue, because of initiatives now in development? And how does that step-up in household penetration across at-home categories influence your view on how you -- what you think about these categories and what they can grow longer term? Thanks..

Let me kick it off, give a quick thing. And then, Chris, I'm sure will add some perspectives. So let's take each of the -- let's take food, for instance. A lot of innovations that we just launched the Rubbermaid Brilliance Glass. So there are so many aspects in certain product categories that we'll keep innovating.

Look, it will be a tough comp, for sure. So there's no way you can expect that you'll have similar stuff next year, especially the first half. But we think this is a growth business. And just let me give you one thing. Our e-commerce penetration in this business is lower than others. And we've got a very e-commerce savvy CEO, Chris Makowski.

And already this year, since she's come on and the e-commerce team achieve worked on, the penetration has increased dramatically, but there's still a long way to go. So, I think that is the market. Home fragrance, it's not just candles. That team is getting us into all kinds of new areas like diffusers, outdoor candles, car air fresheners, et cetera.

So, there's growth there. So, I think appliances, Chris Robins is really looking at the root of the issues and saying, how do you get that going. So, yes, tough comps, don't want to over promise, but the fundamentals are that we are going to attack the fundamentals and keep driving it.

Chris, you want to add some stuff there?.

Yes. The only other thing I would add is that we have some other businesses that are going to have easy comps next year. And so I think what you're going to see is that the results are going to be a little bit choppy by quarter and by business. But as we mentioned, from an overall company standpoint, that's one of the strengths of the portfolio.

And we're excited that we're back to core sales growth. And we think we've got the opportunity to really deliver against our long-term model. So, -- and the last thing I would say is we don't anticipate the underlying consumer demand trends to change radically in the near-term.

So, we do expect that from everything we're hearing and everything we're seeing, that the at-home consumption trends are likely to be with us for some time. As Ravi mentioned, some of those businesses will comp.

We'll face higher comps as we get into the back half of next year, but there are other businesses of ours, notably writing that will face easier comps and that's the benefit of the portfolio..

Well, thank you very much to everybody. Stay safe, wear your masks. Appreciate your support, onwards and upwards. That's a wrap. Thank you..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..