Newell Brands Inc. (NASDAQ:NWL) Q4 2023 Earnings Call Transcript
Newell Brands Inc. (NASDAQ:NWL) Q4 2023 Earnings Call Transcript February 9, 2024
Newell Brands Inc. beats earnings expectations. Reported EPS is $0.22, expectations were $0.17. NWL isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Newell Brands' Fourth Quarter and Full-Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. [Operator Instructions]. 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 Sofya Tsinis, VP of Investor Relations. Ms. Tsinis, you may begin.
Sofya Tsinis: Thank you. Good morning, everyone. Welcome to Newell Brands year-end earnings call. On the call with me today are Chris Peterson, our President and CEO; and Mark Erceg, our CFO. Before we begin, I'd like to inform you that during 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 other SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements.
Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those 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 that were furnished to the SEC. Thank you. And now I'll turn the call over to Chris.
Chris Peterson: Thank you, Sofya. Good morning, everyone, and welcome to our year-end call. I want to start with a brief recap of the significant progress we have made during 2023 on the turnaround agenda. In June, we introduced and deployed a comprehensive new corporate strategy, which focuses on disproportionately investing in innovation, brand building and go-to-market excellence in our top 25 brands and top 10 markets as part of a clear set of where to play and how to win choices. These choices were informed by a thorough and brutally honest company-wide capability assessment we conducted earlier in 2023 and which unveiled gaps in Newell's front-end commercial capabilities. Following deployment of the new corporate strategy, we proceeded to fully cascade and integrated into business, region, brand and functional strategies to ensure clarity and consistency of direction across all areas of the company.
Last month, we announced additional changes to our operating model designed to accelerate progress in key capability areas such as innovation, brand building and go-to-market excellence while driving even further standardization and scale efficiencies across the supply chain and back-office functions. As part of this evolution, we have now stood up a cross-functional brand management organization and for our top 25 brands established multifunctional brand teams, spanning brand management, consumer and shopper insights as well as finance, customer strategy and planning and supply chain functions. This move allows holistic support for each brand, keeps consumers at the heart of all we do and ensures appropriate financial and operational rigor is in place to drive on our ambitions.
Building on the success of the One Newell approach with Newell's top four customers as part of the organizational realignment, we centralized domestic retail sales teams under our Chief Customer Officer. Further reinforcing our partnerships, simplifying interactions and allowing for additional joint business plans. We also created a new business development team focused on driving distribution with new customers and expanding categories with existing customers. We expect these changes will enable our teams to better leverage Newell's portfolio of leading brands and critical selling capabilities to accelerate both category growth and Newell's market share while serving as best-in-class partners to our customers. Over an eight-month period, key members of the leadership team and I visited eight of Newell's top 10 countries across North America, Europe and Latin America.
These visits reinforced our view that international markets, which accounted for about 37% of Newell's sales in 2023 represent an attractive growth opportunity, particularly if we fully harness the scale benefits and embrace the One Newell go-to-market model. As a result, we are further simplifying and standardizing Newell's regional organizations, which will pivot their focus to commercial delivery, with the goal of accelerating speed, agility, effectiveness and ownership. We've made significant progress upgrading talent across the organization to close skill gaps and accelerate capability build-out. We have now filled the majority of critical leadership positions across the company. The two latest hires to the executive team include a new Chief HR Officer; as well as a new CEO of the Outdoor & Recreation business, who both bring a wealth of relevant experience and knowledge.
We are excited to have them on board. We've made significant progress on each of the 18 breakthrough capability projects we chartered as part of the new corporate strategy. For example, we completely reinvented the consumer insights function under a new leader that we brought in last year. We believe this will unlock actionable insights as well as proprietary understanding of consumers and customers so that we can enable superior innovations with stronger claims. We have also overhauled Newell's innovation approach around the biannual review process and put in place a project tiering system that helps identify big bets. Our goal is to launch fewer, bigger and longer lasting innovations that are gross margin accretive. While the health of the funnel is not yet where I'd like it to be, we have made considerable progress, not just on cutting the tail, but also identifying Tier 1 and 2 innovations for the coming years.
I'll talk more about these as they come to market. To strengthen our market-leading brands with consistent brand building and compelling brand communications, we've put considerable effort into building brand management into a foundational capability for Newell. In addition to upgrading brand manager talent, we put exceptional performance standards in place with clear KPI-driven expectations for all brand managers. We also rolled out a pillars of competitive advantage framework so that we can evaluate our brands relative to competition, on product performance, brand communications, packaging, omnichannel execution and value. Finally, we implemented a new set of corporate values focused on better serving consumers, increasing accountability, driving a sense of urgency and returning the company to winning in the marketplace.
We have been and will continue to move with speed and agility to action our strategy while developing and strengthening the capabilities required to win. Turning to financial results. Full-year numbers were either in line with or ahead of our latest outlook across all key metrics. Sales came in ahead of our expectations, driven by stronger-than-expected U.S. demand. Normalized gross margin improved sequentially each quarter and inflected positively in the back half, driven by record-setting productivity performance and the July pricing action to proactively address situations where unit economics were untenable. Operating cash flow increased $1.2 billion versus 2022, ahead of our forecast as we took out about $700 million in inventory. We continue to drive out complexity ending 2023 with approximately 21,000 SKUs down about 25% year-over-year.
We unlocked over $150 million of pretax savings through Project Phoenix, which helped mitigate inflationary pressure on overheads, and we reduced net debt by about $500 million, driven by strong cash flow. While we are pleased with the significant progress in 2023, we are not satisfied with the 12% core sales decline for the business, even as we estimate that close to 80% of it stemmed from category contraction and retailer inventory actions. We are laser-focused on returning the company to sustainable and profitable growth and more broad-based share gains and that is precisely why we have been moving at pace in implementing our strategy. Turning to 2024. We expect the macroeconomic backdrop to remain challenging as consumers remain under pressure and geopolitical uncertainty creates a dynamic operating environment.
Our outlook assumes that Newell's categories continue to contract, albeit not as much as last year. We also believe retailers will continue to manage inventory tightly in durable and discretionary categories. Within this context, we plan to drive continued strong progress on the Turnaround Agenda and have established five major priorities for 2024. First, continue to operationalize our new strategy and operating model, unlocking the full potential of the organization and our portfolio of leading brands. This includes fortifying organization, talent and cultural capabilities to better enable meaningful innovation, stronger brand building and operational excellence. Second, improved top line and market share performance on a sequential basis as the capability work starts to yield tangible results in the marketplace.
Third, drive strong gross margin and operating margin improvement, building on the progress made in the second half of 2023 by realizing benefits from a scaled and advantaged supply chain via productivity and other efficiency projects while also delivering the anticipated savings from Project Phoenix and organization realignment initiatives. Fourth, continue to delever the balance sheet and improve the cash conversion cycle by driving strong operating cash flow. Within this, we are planning to fully fund all the necessary high-return capability improvement and restructuring projects to build a multiyear productivity improvement runway. And lastly, continue to reduce complexity through business process redesign with a focus on simplification and accountability, technology standardization enablement and continued SKU count reduction across the organization.
Amidst the challenging operating environment during 2023, we drove record productivity across the supply chain, significantly improved cash flow by rightsizing inventory, further reduced Newell's SKU count and took decisive actions to strengthen the company's front-end commercial capabilities. On behalf of the entire leadership team, I would like to express our gratitude to all of our employees who have embraced the new strategy and have shown tremendous resilience, commitment and grit despite a bold change agenda. The tangible progress on our strategy and turnaround agenda more broadly bolster our confidence that we are taking appropriate actions to strengthen the organization, improve its financial performance and create value for our stakeholders.
I'll now turn the call over to Mark.
Mark Erceg: Thanks, Chris. Good morning, everyone. While core and net sales were better than expected at down 9%. We believe the most important financial story of the fourth quarter is the dramatic improvement achieved in the underlying structural economics of the business as evidenced by a 570 basis point improvement in normalized gross margin versus a year ago. Simply put, the targeted interventions we have made to improve the underlying structural economics of the business, such as the July 2023 high single to low double-digit pricing action on roughly 30% of our U.S. business, primarily in the Home & Commercial segment as well as the reduction in the manufacturing labor force across selected sites are clearly showing up in the financials.
The company's fourth quarter normalized gross margin of 32.3% represented a 100 basis point improvement sequentially and the second consecutive quarter of year-over-year expansion despite sustained pressures on volumes. Remember, as Chris mentioned earlier, approximately 80% of our reduction in core sales this year was due to retailer inventory actions and category contraction. The resulting lower volumes when combined with nearly $700 million of inventory reduction, which we unilaterally removed from the system throughout the course of the year had a significant impact on capacity utilization and makes the over 500 basis points of productivity delivered in the fourth quarter by our exceptionally talented supply chain organization even more impressive.
On the SG&A front, meaningful savings were also realized with Project Phoenix providing $53 million of benefit in the fourth quarter, which helped partially offset higher incentive compensation and the deleveraging impact on SG&A from a weaker top line. Fourth quarter normalized operating margin increased 280 basis points to 7.7%. Encouragingly, this is the first time normalized operating margin has expanded since the second quarter of 2022, which we believe is another proof point that the right strategy is now in place. During the fourth quarter, net interest expense increased $6 million versus last year to $70 million due to higher interest rates and discrete tax benefits yielded a normalized tax benefit of $10 million all of which brought normalized diluted earnings per share in at $0.22.
Importantly, this was considerably better than the $0.15 to $0.20 outlook we previously provided. Turning to operating cash flow. $251 million was generated in the fourth quarter, bringing full-year operating cash flow to $930 million, an increase of $1.2 billion versus 2022. You will recall that at the start of 2023, improving cash flow was our #1 financial priority. So we are very pleased that the team over-delivered on this critical metric despite greater than originally anticipated macro headwinds. Strong cash flow allowed us to reduce gross debt by about $500 million during the year with over $200 million of that reduction occurring between the third and the fourth quarter which helped lower our leverage ratio from 6.1x at the end of Q3 to 5.6x at the end of Q4.
Turning to 2024. Expectations have not changed since our last earnings call. We said fiscal 2024 core sales were expected to be down year-over-year and below our evergreen target of up low single-digits, with operating margin expansion ahead of the evergreen target of 50 basis points. Consistent with this, we expect the following for 2024. Core sales and net sales are expected to decline 3% to 6% and 5% to 8%, respectively for two primary reasons. First, we expect our categories on average to contract low single-digits in 2024. While we wish this wasn't the case, we nonetheless view this as a source of optimism since this is considerably better than the high single-digit contraction experienced in 2023. Second, we expect distribution losses and product line exits to exceed distribution gains by about two points due to our business decision to exit some structurally unprofitable businesses.
Finally, please note that the two-point difference in expected core versus net sales is driven primarily by unfavorable foreign exchange and to a lesser extent, category exits. We expect normalized operating margin between 7.8% and 8.2%, which at the midpoint represents a 100 basis point improvement, which is 2x our Evergreen Target, which calls for a 50 basis point improvement each year. The increase in normalized operating margin should be driven by strong gross margin improvement as another year of world-class productivity gains and the annualization of the July 1, 2023 pricing action more than offsets an expected low single-digit headwind from inflation. Having just touched on pricing, it bears mentioning that given the degradation in the company's gross margin level in prior years, we are fully committed to restoring Newell's gross margins to provide the necessary fuel for reinvestment behind the business going forward.
However, our guidance does not reflect any significant incremental positive pricing actions during 2024. Within SG&A, we expect overhead costs will be down meaningfully in absolute dollar terms which should stay close to flat as a percentage of sales. The combined savings from Project Phoenix and our more recent organizational realignment should more than offset professional wage and benefit inflation and a series of incremental investments being made to enhance several critical core capabilities required to support our new corporate segment, regional, brand and functional strategies. Despite robust cost control, the anticipated contraction in top line sales we expect to incur in 2024 will keep overhead costs as a percentage of sales elevated in the short term.
Outside of overhead expense, advertising and promotion represents the balance of SG&A. We are planning to spend more in both absolute dollar terms and as a percentage of sales as we are beginning to see improvement in our innovation funnel and brand building activity and therefore, have more investable opportunities at our disposal. For 2024, we are assuming that interest expense steps up by $15 million to $20 million and that our tax rate is in the mid-teens. Importantly, this compares to a tax benefit of $68 million in 2023. All in, we expect normalized diluted earnings per share in the range of $0.52 to $0.62. Now we'll be the first to admit that at first glance, this does not compare favorably to the $0.79 per share just recorded. However, once a $0.26 year-over-year tax differential is accounted for, the midpoint of this range represents high single-digit growth versus last year, which we believe represents good progress in our corporate turnaround.
For the year, we expect to generate operating cash flow of $400 million to $500 million. This range assumes another meaningful improvement in our cash conversion cycle, just not at the record level achieved during 2023 when nearly $700 million of excess inventory was removed and Newell's cash conversion cycle dropped by 24 days. Our operating cash flow range also includes about $150 million to $200 million in cash restructuring and related charges. Frankly, we briefly considered slowing down some restructuring efforts, but the rates of return associated with Project Phoenix, the network optimization project, the organizational realignment and other initiatives are all so compelling, the decision was taken to aggressively but thoughtfully move forward with a multifront transformation of Newell Brands.
During fiscal 2024, we plan to invest about $300 million in capital expenditures, most of which will be spent on high-return cost-saving projects to further improve the structural economics of the business and accelerate the turnaround. While fully funding numerous high-return internal projects, we also plan to reduce our leverage ratio and strengthen our balance sheet with an expected return to a more typical seasonal cash flow pattern, characterized by a use of cash in the first half of the year, followed by meaningful cash generation in the second half, Newell's leverage ratio will likely increase as we move towards the midpoint of the year before dropping to about 5x by the end of Q4. Long-term, we remain committed to achieving investment-grade status and continue to target a leverage ratio of about 2.5x.
But in the meantime, we wanted to create additional financial flexibility. So we proactively amended the terms of Newell's revolver, even though we were fully compliant with all covenants at the end of the fourth quarter. As a result of the amendment, which was finalized earlier this week, the revolving facility was converted to a $1 billion secured facility, which we believe provides us with ample liquidity going forward. Free cash flow productivity is expected to significantly exceed our 90% Evergreen Target during 2024. As it relates to the first quarter of 2024, we expect a core sales decline of 6% to 8%, with net sales down 8% to 10% versus last year. Please note that the two to three point difference between our full-year and first quarter core sales assumptions can be largely attributed to a greater impact from net distribution losses due to our decision to exit some structurally unattractive businesses, as well as weaker market share performance at the start of the year as the benefits from the capability build-out should improve sequentially going forward.
As with the full-year, the two-point difference in expected core versus net sales is driven primarily by unfavorable foreign exchange and to a lesser extent, category exits. For the first quarter of 2024, we expect normalized operating margin of 2.4% to 3.2%, which at the midpoint would represent a 40 basis point improvement versus 2023. We expect gross margin to continue to expand versus last year, although not nearly as much as in the fourth quarter, largely due to FX impacts and less favorable capitalized variance adjustments. Total SG&A dollars should be down versus a year ago despite spending more on A&P, but because of the anticipated sales decline, SG&A as a percentage of sales should be up by less than the amount gross margin should expand.
After incorporating slightly higher interest expense and a modest tax help, we were looking for a normalized diluted loss per share in the range of $0.05 to $0.09. That said, Q1 is typically Newell's smallest quarter of the year due to seasonality. And as a result, it is not indicative of full-year margin trends. In closing, we believe a great deal was accomplished during 2023, which has laid the groundwork frame much stronger 2024 as part of our multiyear journey to put the organization and the business with the right set of core capabilities, inclusive of sound business processes and cultural attributes required to fully operationalize Newell's new corporate strategy and in doing so, dramatically strengthened the company's financial performance going forward.
Operator, if you could, please open the call for questions.
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