Newell Brands Q3 2022 Earnings Results & Report

Newell Brands EPS Results

• Actual EPS: $0.53
• Consensus EPS: $0.47
• Beat/Miss: Beat by +$0.06
• One Year Ago EPS: N/A
• EPS Beat Rate: 5 of last 8 quarters

Newell Brands Revenue Results

• Actual Revenue: $2.25 billion
• Expected Revenue: $2.26 billion
• Beat/Miss: Missed by -$4.90 million
• YoY Revenue Growth: N/A

Newell Brands (NASDAQ:NWL) is a global consumer products company that designs, manufactures and markets products used in homes, workplaces and outdoor settings. Its portfolio includes well-known brands such as Rubbermaid, Sharpie, Graco, Coleman, Yankee Candle, Crock-Pot, Mr. Coffee, FoodSaver, Calphalon, Elmer’s and Sistema.

The company’s products span food and home storage, cookware and small kitchen appliances, writing instruments and other learning supplies, baby and parenting products, outdoor and recreation equipment, home fragrance, and commercial products. Newell Brands sells through retailers, e-commerce channels and other distributors in markets around the world.

The company traces its roots to Newell Manufacturing, founded in 1903. It became Newell Rubbermaid following the 1999 acquisition of Rubbermaid and adopted the Newell Brands name after merging with Jarden Corporation in 2016. Newell Brands is headquartered in Atlanta, Georgia, and is led by President and Chief Executive Officer Chris Peterson.

Newell Brands Q3 2022 Earnings Call Transcript

Key Takeaways

• Q3 core sales declined 10.8% year-over-year, with year-to-date core sales off 1.3%, driven by retailer destocking, inflation, and a stronger dollar despite pricing and productivity efforts.
• The Commercial Solutions segment was a standout, with core sales up over 9% in both Q3 and YTD, fueled by price realization, innovation on cost-in-use products, and B2B channel momentum.
• Consumer-facing units – Home Appliance, Home Solutions, Baby, Writing, and Outdoor – saw volume declines, though Baby and Writing maintained demand above 2019 levels and benefited from new launches like Turn to Me car seats and Elmer’s Squishies.
• Preparing for a 2023 recessionary environment, management’s top priorities include accelerating cash flow, recovering gross margins through productivity and pricing, reducing overhead, investing in higher-margin businesses, and further simplifying SKUs.
• Elevated inventories and supply-plan pullbacks led to a YTD negative operating cash flow and about 100 bps Q4 gross margin headwind; significant cash generation is expected in Q4 with working capital normalization slated for H1 2023.

Presentation

[Operator]

Good morning, ladies and gentlemen and welcome to Newell Brands third quarter 2022 earnings conference call. At this time, all participants are in listen only mode. After a brief discussion by management, we will open up the call for questions. In order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. 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 Sofya Tsinis, Vice President of Investor Relations. Ms. Tsinis, you may begin.

[Sofya Tsinis, VP of Investor Relations at Newell Brands]

Thank you. Good morning, everyone. Welcome to Newell Brands third quarter earnings call. On the call with me today are Ravi Saligram, our CEO and Chris Peterson, our President and 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, Forms 10-Q and other SEC filings available on our investor relations website for further discussion of the factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those referred to as normalized measures.

[Sofya Tsinis, VP of Investor Relations at Newell Brands]

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 materials on Newell's Investor Relations website. Thank you and now I'll turn the call over to Ravi.

[Ravi Saligram, CEO at Newell Brands]

Thank you, Sofya. Good morning everyone and thank you for joining us on our third quarter call. Following strong performance over the first half of the year, the company's results decelerated in the third quarter, reflecting a tough operating environment as many retailers rightsized their inventory positions, inflationary pressure on both the consumer and our business, as well as the impact of a stronger dollar. Additionally, Q3 performance was unfavorably impacted by customers shifting orders into the first half. As a result of these factors, core sales turned negative in the quarter, declining 10.8% on top of 3.2% growth last year. This had a corresponding deleveraging impact on normalized operating margin, which contracted 120 basis points year-over-year despite strong progress on productivity and cost containment actions.

[Ravi Saligram, CEO at Newell Brands]

Core sales declined year-over-year in all business units except the commercial business as the pullback in customer orders was a significant headwind. International markets outpaced North America as we did not experience the same level of retailer inventory reductions there. Core sales outside North America declined 1.4% as 4.8% growth in Latin America was offset by declines in EMEA and Asia Pacific. Weak consumer confidence due to record inflation and concerns surrounding the war in Ukraine continued to weigh on the EMEA region, with APAC region impacted by COVID-related restrictions and lockdowns in certain markets. Year to date, Newell Brands' core sales declined 1.3% on top of a challenging 15.2% growth comparison a year ago, as normalized operating margin expanded 10 basis points year-over-year despite significant inflationary and foreign exchange headwinds.

[Ravi Saligram, CEO at Newell Brands]

Many of our key brands continued to show strength year to date, including Rubbermaid Commercial Products, Sharpie, Paper Mate, Expo, Elmer's, Ball, Rubbermaid and Contigo. While domestic consumption moderated year-over-year, it continues to exceed 2019 levels, both during the third quarter and year to date. Going forward, we expect demand patterns to continue to be unfavorably impacted by inflationary pressure on the consumer, which has constrained discretionary spending, particularly for value-driven shoppers. In some categories, such as home fragrance, we have lost low-income shoppers who were only able to enter the category last year due to the boost from the government stimulus. We expect some pandemic-related trends that elevated demand to continue to subside.

[Ravi Saligram, CEO at Newell Brands]

Due to concerns about the high price of everyday goods and gas, a potential recession, rising interest rates and declining personal savings rate, we are seeing a more cautious consumer today but one that is willing to purchase an offering that provides good value. We have been optimizing our product assortment to ensure it provides the appropriate value proposition to the consumer. We've also been activating shopper campaigns with a focus on value messaging to better connect with shoppers and customers. The commercial business unit was a true standout this quarter and year to date, registering core sales growth north of 9% in both time periods, enabled by excellent execution and strong price realization. With our innovation and assortment hyper-focused on reducing cost in use and delivering savings to our end users. It is leading to positive momentum in our B2B verticals and professional customers and distributors.

[Ravi Saligram, CEO at Newell Brands]

Strength in the B2B professional channel was further fueled by improved mobility and return to the office, as well as distribution gains, which help offset the impact of moderating traffic at retail. In the B2B channel, customers seek performance, quality, strength and durability, all of which are at the core of our Rubbermaid Commercial Products offerings. As a result of shifting consumer behaviors, the decision by many retailers to aggressively manage their inventory levels and reduce orders weighed on performance on the majority of our consumer-facing businesses. While core sales declined for six business units during the third quarter, we do not believe this is indicative of underlying operational health issues but rather the dynamic environment we're in, as well as base period comparisons. Let me illustrate this point through a discussion of our Baby and Writing business units.

[Ravi Saligram, CEO at Newell Brands]

The Baby business was cycling against a challenging double-digit core sales growth comparison. While core sales declined in the quarter, it increased relative to 2020 and 2019 levels despite the headwind from retailer actions, as well as the shift in timing of shipments into Q2 ahead of Project Ovid implementation. Domestic consumption grew versus last year across baby gear and baby care categories, which have shown some resiliency given the non-discretionary nature of the products. We continue to see strength in our industry-leading turning car seats, some major new innovations, under both Graco and Baby Jogger brands. NUK for Nature collection is also delivering very strong performance. For Writing, given the timing shift of some retailer orders for back to school into the first half of the year, it's more appropriate to focus on year-to-date performance.

[Ravi Saligram, CEO at Newell Brands]

Core sales increased low single digits year to date, with domestic consumption also up versus last year. During the back-to-school season, the category grew modestly as a strong start due to earlier store resets was followed by a slowdown for the end of the season. We held our ground despite supply constraints across several categories, including mechanical pencils, ballpoint pens and highlighters. Dry-erase markers and glue sticks were the best-performing categories during the back-to-school season for us. Year to date, the office channel has seen steady growth as return to office continues to progress. While work is already underway in preparation for next year's back-to-school season, as we look to the balance of this year, we're excited to expand our offerings in the vibrant children's activity category. We recently launched Elmer's Squishies.

[Ravi Saligram, CEO at Newell Brands]

This do-it-yourself kit includes everything to make your own surprise squishy toy in just 60 minutes. This is a fun new way to unlock creativity and imagination with kids and an exciting expansion of the Elmer's brand into an adjacent category. We are continuing to invest in innovation and brand building and writing and ensure we have the right price pack architecture in key markets that convey strong value. 2022 has been a dynamic year as it relates to the operating backdrop, consumer and customer behavior, as well as the overall macroeconomic and geopolitical environment. 2022 has also been a tale of two cities for Newell Brands with strong first half results followed by significant slowdown in the back half.

[Ravi Saligram, CEO at Newell Brands]

We have been very disciplined with pricing actions over the past two years to help mitigate the impact of massive inflation. Despite progress on productivity and pricing, we do expect to take a step backwards on gross margin this year due to fixed cost deleveraging, the high level of inflation and unfavorable currency impact. However, we remain as committed and focused as ever to rebuilding gross margin and reaching benchmark levels over time through productivity initiatives, inclusive of Project Ovid and automation, to being very disciplined around launching gross margin accretive innovation through significant pricing actions internationally to offset the impact of transactional FX for proactive price mix and category management as we are assessing additional opportunities to optimize category mix within each business unit.

[Ravi Saligram, CEO at Newell Brands]

And a strong emphasis on revenue growth management, taking an even more aggressive stance on SKU reduction and supply network optimization. With the macro backdrop getting more difficult in recent months, we expect economic uncertainty and external disruptions to persist in the near term. As a result, we think it's prudent to plan for a recessionary environment in 2023 with a softer top line. We're acting with speed and agility as we adjust our playbook to this environment while taking actions that are within our control to maximize profits and cash. Within that context, the top five priorities we are laser focused on include number one, accelerating cash flow generation as we significantly rightsized the company's inventories. Number two, driving a recovery in gross margins as we turbocharge productivity and price internationally to mitigate the transactional foreign exchange impact.

[Ravi Saligram, CEO at Newell Brands]

Number three, significantly reducing overheads, both in the U.S. and internationally by leveraging the scale of One Newell while closely managing discretionary expenses and optimizing advertising and promotion spending as well as the company's office footprint. Finally, redirecting investment towards higher margin businesses, in particular, Writing, to turbocharge innovation and to best leverage the power of our brands and diverse portfolio to meet consumer and customer needs. Fifth, delivering the next level of simplification and complexity reduction by accelerating SKU rationalization, transforming manufacturing operations and creating a portfolio of mega brands. Importantly, we're applying a balanced approach between ensuring we effectively navigate through the short-term challenges and volatility while maintaining the long-term focus. Our ultimate goal is to position the company to come out even stronger as the macros improve.

[Ravi Saligram, CEO at Newell Brands]

We will harness the strength of our brands, build on our e-commerce and omni prowess, leverage our scale to drive a One Newell approach to realize synergies, reduce international fragmentation, continue to transform our supply chain to focus on manufacturing efficiencies and vigorously reduce complexity to build competitive advantage and drive sustainable and profitable growth. The decisive actions we've taken over the past several years to address pandemic-related challenges while executing on the turnaround agenda, we believe have enabled us to be a much more operationally agile and resilient consumer and customer-centric company. We continue to see a long runway ahead for value creation. Onward and upward and now I'll turn over to Chris.

[Chris Peterson, President and CFO at Newell Brands]

Thank you, Ravi and good morning, everyone. Third quarter results were generally in line with our updated outlook. During Q3, we enhanced Newell's financial flexibility and maintained strong cost discipline as we took decisive action to lessen the effect on our business from retailer inventory rebalancing, softer consumer demand, inflation and a stronger dollar. Results were impacted by top line deleveraging, as well as the actions we took to manage the company's supply plan. Net sales for the quarter decreased 19.2% year-over-year to $2.3 billion, driven by lower core sales, the impact of the sale of the CH&S business at the end of Q1, unfavorable foreign exchange and certain category and retail store exits. Core sales declined 10.8% as lower volume more than offset higher pricing.

[Chris Peterson, President and CFO at Newell Brands]

Core sales were negatively impacted by a significant pullback in orders from major customers as they rightsized their inventory. The previously disclosed timing shift of customer orders from Q3 to the first half lowered core sales this quarter by a couple of points. Normalized gross margin declined 120 basis points to 29.4% versus the same period last year. Fixed cost deleveraging and significant headwinds from foreign exchange and inflation more than offset benefits from pricing and fuel productivity savings. Normalized operating margin contracted 120 basis points versus last year to 10.2% as an increase in advertising and promotion expense as a % of sales and gross margin contraction more than offset the benefit from lower overhead costs. Net interest expense declined $8 million from the year ago period to $57 million.

[Chris Peterson, President and CFO at Newell Brands]

The normalized tax benefit was $58 million, largely reflecting a significant benefit from discrete tax items during the quarter. This resulted in normalized diluted earnings per share of $0.53, close to $0.54 a year ago. Turning to segment results. Core sales for the commercial solutions segment grew 9.2%, reflecting successful pricing actions to cover inflation. Core sales for the home appliance segment declined 23.2%, driven by softening demand across product categories. Core sales for the home solutions segment decreased 11.6% as core sales were under pressure across both the food and home fragrance businesses. Core sales for the learning and development segment declined 9.9%. Core sales for the baby and writing businesses contracted against challenging double-digit comparisons from last year and were unfavorably impacted by a shift of customer orders into the first half of this year.

[Chris Peterson, President and CFO at Newell Brands]

Core sales for the outdoor and rec business declined 18.4% as performance was hindered by a shift of retailer orders into the first half of this year and softening demand. Moving on to the cash flow and balance sheet. Year to date through Q3, operating cash flow was a use of $567 million as an increase in working capital use temporarily extended the cash conversion cycle. Inventory levels remain elevated due to significantly greater than expected reduction in retailer orders during Q3, as well as slowing demand. Furthermore, the timing of our pullback on the supply plan weighed on payables. We continue to adjust our demand and supply forecast to reflect current realities and expect to significantly reduce the company's inventory levels by year-end.

[Chris Peterson, President and CFO at Newell Brands]

These actions should generate a significant amount of cash flow in Q4. Given the lead times on our supply plan, we do expect to end 2022 with an elevated level of working capital, which we plan to right-size in 2023. This will lead to a significantly lower level of operating cash flow in 2022 than typical, with an expected bounce back in 2023. In Q3, the company strengthened its financial flexibility by refinancing its prior senior unsecured revolving credit facility and upsizing borrowing capacity under the facility to $1.5 billion. In September, Newell raised $1 billion through the issuance of $500 million of 6.375% notes due 2027 and $500 million of 6.625% notes due in 2029.

[Chris Peterson, President and CFO at Newell Brands]

In October, we used the net proceeds of the offering together with available cash to redeem $1.1 billion of outstanding senior notes that were coming due in April of 2023. We have cleared the runway on our debt profile and do not have any major maturities until mid-2025. For the remainder of the year, we expect the macroeconomic and operational environment to remain difficult, with further pressure from retailer inventory reductions. Due to high inflation on essentials, we expect discretionary spending levels to remain constrained, pressuring shoppers and driving continued normalization in demand. We expect significant headwind from foreign exchange, given the strengthening of the US dollar against other currencies. We are essentially moving to the lower end of our previous outlook for full year 2022, as we reflect these assumptions as well as our Q3 results.

[Chris Peterson, President and CFO at Newell Brands]

Our updated net sales forecast is $9.35 billion-$9.43 billion, as we expect a core sales decline of 3%-4%. We continue to forecast a nearly 8% headwind from the divestiture of the CH&S business, foreign exchange, certain category exits and closure of some Yankee Candle retail stores. For the full year, we expect a high single-digit benefit from price increases to be offset by a low double-digit decline in volume. This guidance contemplates normalized operating margin contraction of about 70-100 basis points versus last year to 10.0%-10.3%. We are updating the normalized earnings per share outlook to $1.56-$1.61 and anticipate a tax rate in the mid-single-digit % range.

[Chris Peterson, President and CFO at Newell Brands]

As a result of higher than anticipated inventory levels and additional updates to our supply plan that will negatively impact payables, we now expect to deliver operating cash flow significantly below our prior guidance range of $400 million-$500 million. For Q4, we are forecasting net sales of $2.18 billion-$2.26 billion, including a core sales decline of 9%-12% and a more than 10% headwind from the sale of the CH&S business, foreign exchange, certain category exits, as well as closure of some Yankee Candle retail stores. We expect normalized operating margin of 5.1%-6.5% as compared to 9.9% last year, reflecting significant fixed cost deleveraging and an increase in the A&P to sales ratio.

[Chris Peterson, President and CFO at Newell Brands]

We are forecasting normalized earnings per share in the $0.09-$0.14 range, with a normalized effective tax rate in the high teens% range and a similar share count to Q3. While it is too early to discuss specific guidance for 2023, we wanna provide some context on how we are approaching next year. We expect the external environment to be difficult next year and we are taking significant actions across all areas that are within our control to ensure we navigate this backdrop as well as possible and position the company to thrive in a post-recessionary environment. Specifically for next year, we expect consumers' disposable spending power to remain under significant pressure due to inflation in food, housing and energy.

[Chris Peterson, President and CFO at Newell Brands]

We expect continued normalization of home and outdoor categories from COVID peak demand levels and we expect retailers to plan open-to-buy dollars for general merchandise categories conservatively as we likely move into a more recessionary environment. As such, we intend to plan the top line prudently and are looking at a number of different scenarios to ensure we set the cost structure and supply plans appropriately. Currency is expected to be a meaningful headwind based on spot prices. This is largely driven by the euro, yen and pound. To combat this, we are planning for significant incremental pricing actions outside the U.S. to protect the structural economics of the business and mitigate the transactional foreign exchange impact, particularly in Japan and Europe.

[Chris Peterson, President and CFO at Newell Brands]

We expect supply chain pressures to ease as there is greater availability of ocean containers, freight carriers and raw materials and we expect a significantly more favorable cost inflation environment as both commodity and transportation prices move off their peaks and the Chinese yuan devalues versus the U.S. dollar. We are planning to take significant actions to accelerate productivity and efficiency throughout the organization, including accelerating field productivity plans, driving automation and fully implementing Project Ovid based on the strong results we achieved during the first go-live this past July. In combination, we expect this to yield a recovery of gross margins from this year's depressed levels. We are also planning to take significant actions to rightsized overhead costs based on the simplification agenda we have been driving over the past few years.

[Chris Peterson, President and CFO at Newell Brands]

We are early in the planning stages for this and we'll share more details in the next few months. We also expect to bounce back on cash flow from timing of inventory purchases and payables. We've made a tremendous amount of progress over the last three to four years that we believe positions us to be much more resilient at managing the external headwinds and quickly pivoting our plan of action in response to changing external dynamics. It takes time for the impact from these actions to be fully reflected in the company's results, particularly given the long lead times on sourced businesses. However, we are taking the necessary steps to optimize Newell's cost structure, reduce inventory and maximize cash flow so that we are in the best position to navigate through this dynamic environment.

[Chris Peterson, President and CFO at Newell Brands]

We'll provide more details on our fourth quarter call. We remain laser-focused on maintaining operational agility and strategic execution to position Newell for sustainable and profitable growth over the long term. Operator, let's open up for questions and answers.

[Operator]

Thank you. Ladies and gentlemen, to ask a question, you will need to press star one one on your telephone keypad. One moment please for our first question. Our first question coming from the line of Bill Chappell from Truist. Your line is open.

[Bill Chappell, Managing Director at Truist]

Thanks. Good morning.

[Chris Peterson, President and CFO at Newell Brands]

Morning, Bill.

[Ravi Saligram, CEO at Newell Brands]

Morning, Bill.

[Bill Chappell, Managing Director at Truist]

Wanted a little more color on kind of the inventory reductions at retail as you go into seasonal categories. I mean, in particular, like appliances, where you're gearing up and shipping, you know, to make sure all the shelves are stocked. I mean, how is that working? Do you feel like we're kind of done with the process or you're aware of where all the reductions will come or are there still other categories that have yet to hit peak season where this could happen again?

[Ravi Saligram, CEO at Newell Brands]

Go ahead.

[Chris Peterson, President and CFO at Newell Brands]

Yeah. I think what we're seeing is retailers continue to pull back on inventory levels, particularly at many of our top retailers in the U.S. What we've contemplated in our guidance is very much a continuation of that dynamic in Q4, that we saw starting in Q3. We are trying to navigate it as best as possible. Our inventory positions at retail continue to be in good shape. It's more that we're getting caught up with broader actions that retailers are taking. In some cases, as we're heading into the holiday season, we're concerned that retailers are operating with lower than what we would like inventory levels on our items. We expect that retailers will continue because they're overstocked in general merchandise broadly.

[Chris Peterson, President and CFO at Newell Brands]

We think the environment remains challenging through at least the end of this year and that's what's contemplated in our guidance.

[Ravi Saligram, CEO at Newell Brands]

Bill, just what I'd add there is, unfortunately for us, a lot of the buildup of inventories with some of our key customers is either private label or competitive product or other categories not related to us. They've got to work that down before they consider us. Even though our inventory levels are in good shape or as Chris mentioned, some places where we are actually a little concerned that it is approaching lower levels, I think this could, I think that reduction, even though we're hearing things where they're beginning to get a hold of this, it could continue all the way through, like, first quarter of next year. We're taking a prudent view of it.

[Ravi Saligram, CEO at Newell Brands]

That's also affecting our own views on how we're managing inventories and our supply plans, where we're taking very strong action to make sure that we're not overbuilding

[Bill Chappell, Managing Director at Truist]

Got it. Thanks for that color. Just one follow-up, maybe just looking at Baby since you have so many price points from kind of in popular price to super premium. Are you seeing consumer trade down happening in that category or you know, as a kind of a proxy for others or is it that more of a recession-resistant type area where you know, people wanna. The super premium holds up extremely well?

[Ravi Saligram, CEO at Newell Brands]

Yeah, I wouldn't call us super premium. We're probably premium with Graco and then really appealing to a very broad segment with Graco and maybe Baby Jogger a little bit more on the higher end. I think our brands are really despite you looking at Q3 results, if you look at year to date and if you look at how baby business has done versus 2019 and even versus 2020, it's continuing to show positive POS. Our brands on Graco and Baby Jogger are quite really strong. This new innovation that we introduced, which is the Turn2Me for infants, which has been a big pain point from parents, I think is really doing extremely well.

[Ravi Saligram, CEO at Newell Brands]

We just introduced in one of the club merchants another innovation and that is just selling extremely well, with an online retailer, on their Prime Day, we saw strong baby business. We're not seeing the phenomenon. Now, recognize, being the leaders, we took price increases first and so some of the other competitors have taken their time because we are the leader and some of them may not quite follow. I think our brand strength speaks for itself. Now, there are a few items where we've been quite focused on margins as well and the baby business, interestingly, has held up gross margins this year. Overall, we feel pretty good about the operational health of the baby business.

[Bill Chappell, Managing Director at Truist]

Great. Thanks so much.

[Operator]

Thank you. One moment please for our next question. Our next question coming from the line of Kevin Grundy with Jefferies. Your line is open.

[Kevin Grundy, Managing Director at Jefferies]

Great. Thanks. Good morning, everyone. First question for you on debt leverage and free cash flow. So you finished the quarter at 3.9 times. You know, the business is under pressure for all the reasons discussed, as well as this drag from working cap. A few questions with it. One, if you could just perhaps discuss the cadence around the improvement that you're expecting in working capital, maybe some parameters around what we should expect with free cash flow and free cash flow conversion. Then relatedly, maybe just touch on your covenants and then how you're thinking about sort of stress testing the model given the difficulty of the environment, as well as the stronger dollar. Your thoughts there would be helpful and I have a quick follow-up.

[Chris Peterson, President and CFO at Newell Brands]

Yeah, sure. Clearly, this year is going to be under pressure due to working capital. If you look at the inventory level that we are operating at the end of September, we're probably about $500 million higher than a typical level. Because we've made an intervention to pull back on the supply plan, that's having a negative impact on our payables. The combination of that has working capital being a significant use of cash in the short term. We expect inventory levels to go down at the end of Q4 versus Q3 but we don't expect them to get to sort of a going level until we get into the first half of next year.

[Chris Peterson, President and CFO at Newell Brands]

Payables will lag that a little bit because of the supply plan pullback but we do expect to rightsized working capital in the first half of next year. The net result of that is that we're likely to have free cash flow for this year be negative for the company, which will result in a temporary phenomenon of leverage being higher than what we would like. We expect very much to recover during next year as we rightsized the company's working capital. I would expect that we'll see a low free cash flow year this year because of this working capital phenomenon and a bounce back in 2023. From a covenant standpoint, we're in great shape.

[Chris Peterson, President and CFO at Newell Brands]

We've looked at a number of different scenarios, both for the current year and for next year and we have no concerns over covenants going forward. Last thing I will say is that we continue to be committed over the midterm to get the leverage ratio down to 2.5 times. Because of the free cash flow dynamic, this year, we will likely end this year with short-term debt on the balance sheet and I expect next year we'll pay that short-term debt down.

[Kevin Grundy, Managing Director at Jefferies]

Okay. Very good. Thanks for the color there, Chris. Just quick follow-up on OVID. You know, that clearly is gonna unlock a lot of value for shareholders longer term. The worry, of course, is sort of the near term and the macro environment. Related to that, how does the environment change the pace or the scope of OVID? Then two, as we just sort of think about our models, for next year, can you quantify the potential benefit from OVID as we're thinking about the likelihood of top line deleverage and currency? Thanks for that and I'll pass it on.

[Chris Peterson, President and CFO at Newell Brands]

Yeah, sure. First of all, on the timing question on OVID, you know, we are very excited about the implementation that we went through in July. I think I commented on this earlier on the last call that the execution of that first wave went very well. Everything we're seeing today would suggest that it went, if anything, better than we expected. That has given us a lot of confidence in the overall model. We are not changing the timing of the initiative and we plan to do the second and final wave early in 2023 and we're very much on track to do that.

[Chris Peterson, President and CFO at Newell Brands]

For two of the new mixing centers, I think I talked previously about the Newville distribution center being up and running last spring. The Gastonia or new distribution center outside of Charlotte will go live next month. We're, you know, a few weeks away from that coming online and we feel very good about the progress. The net result of Project Ovid going, the second wave happening in the first part of next year is that we expect higher than typical fuel productivity savings next year as a result of Project Ovid. It's too early to quantify the exact amounts of overall productivity savings.

[Chris Peterson, President and CFO at Newell Brands]

Certainly with Project Ovid being a major contributor, we're expecting productivity savings to be a higher than normal contributor next year than what it's been this year.

[Kevin Grundy, Managing Director at Jefferies]

Very good. Thank you.

[Operator]

Thank you. One moment for our next question. Our next question coming from the line of Andrea Teixeira with JPMorgan. Your line is open.

[Andrea Teixeira, Managing Director at JPMorgan]

Thank you. Can you please speak on the cadence of the retail destocking ahead? If you could, I understand from your comments that this is gonna linger. If you could potentially lap it by Q1 next year. To your point about the low single-digit shipment decline for the full year as you're tracking, what is your estimate of the volume consumption decline, compared to that low single-digit? I'm assuming it's lower but I just wanna reconfirm given the destocking.

[Ravi Saligram, CEO at Newell Brands]

Yeah. I think, let me take a shot at it and then maybe Chris can add to it. I'll try to parse the question in a few things. Look, one is that we did take significant price increases. As I've said, we've had a bounce up from price increase but obviously unit volume has declined. They're sort of a wash, if you will. That trend, I think, you are gonna see and that's what's embedded in our overall when you see that, 'cause there's other headwinds as well that come into play. Unit volume has definitely been negatively affected but we're glad we took the price increases when we did and we'll continue next year to drive the price increases internationally. From a cadence standpoint, I think it's tough for us to really predict how the retailers will react.

[Ravi Saligram, CEO at Newell Brands]

What we are trying to do is work at all levels of our retailers, given our strong relationships, brand by brand, SKU by SKU, to see where, hey, safety stocks are really coming down and where their very good high velocity items, where maybe they've gone too low to work with them to try and work on improving, because we don't have the problem that we're overstocked. Our issue is really to make sure that we get to appropriate levels. When I said first quarter of next year that this could continue, that's just based on everything we're seeing. It could happen earlier but that's our sort of best guess. I don't think there's a specific cadence to it because we can't predict where they are.

[Chris Peterson, President and CFO at Newell Brands]

Just to quantify what Ravi Saligram is saying, our guidance for the full year is for core sales to be down 3%-4%. That includes a high single-digit contribution from pricing and a low double-digit decline in volume for the year.

[Andrea Teixeira, Managing Director at JPMorgan]

Just one clarification on that low double digits. Like, what are the categories again that obviously are the ones that were benefiting the most from consumption, right? The home fragrances and food storage and small appliances. Can you talk to the ones that are not being as impacted?

[Ravi Saligram, CEO at Newell Brands]

Look, where the unit declines is occurring the most is obviously, I think appliances is really where one because the stimulus and where I think and given that there are long purchase cycles, that's why that business is the most severely affected. Second, the unit volumes are also negatively affected in home fragrances because we've lost a ton of low-income consumers who came in due to the stimulus. Those would be some of the two businesses. Third would probably be outdoor and certain categories where we're continuing to do well. As I've said, the commercial business continues to do well and our writing business year to date, we're up low single digits in terms of growth in writing. Those would be the two businesses that are still doing well.

[Ravi Saligram, CEO at Newell Brands]

On food, pockets of food, like the Ball brand has continued to do extremely well for us as well as Rubbermaid and Rubbermaid Brilliance is doing extremely well. Those would be a quick snapshot of where we are.

[Andrea Teixeira, Managing Director at JPMorgan]

Super helpful. Thank you.

[Operator]

Thank you. One moment for our next question. Our next question coming from the line of Steve Powers with Deutsche Bank. Your line is open.

[Steve Powers, Managing Director at Deutsche Bank]

Hey, great. Thanks and good morning. As part of your preparations for the environment you foresee ahead, you talked about further prioritization of SKU simplification and obviously inventory reduction. I guess I'm left wondering, are there charges, obsolescence charges or outsized promotions that you foresee as part of accomplishing that simplification or clearing that inventory? If that's question number one. I'm also curious as to how your preparations for the year ahead impact your new product agenda for 2023, in terms of the innovation you're gonna bring to market. Is that likely a reduced agenda, a more focused agenda? Just how you're thinking about innovation into a much more difficult environment for the consumer.

[Ravi Saligram, CEO at Newell Brands]

Steve, I'll answer the innovation piece. I'll let Chris Peterson talk about inventory reductions. One of the things to understand is our obsolete is really not the greatest. It's more excess that there are no expiration dates. Chris Peterson, why don't you amplify on that piece and then I'll pick up on the innovation side.

[Chris Peterson, President and CFO at Newell Brands]

Yeah. As Ravi said, it's unlikely that we're gonna have significant obsolescence charges. We don't see that as an issue. The background for that is the way that we're planning to rightsized our inventory is predominantly through reducing the supply plan. We think that's the better way to do it because that avoids disrupting the marketplace by trying to liquidate product in the market at excessive discounts. Most of the higher than going level of inventory that we have, as Ravi said, is good inventory that doesn't have an expiration date that's excess rather than things that have been discontinued. The one thing that will impact in terms of the P&L that we're seeing and is in our Q4 guidance is that as we pull back on the supply plan, there is manufacturing fixed cost absorption issue.

[Chris Peterson, President and CFO at Newell Brands]

That's probably affecting the Q4 gross margin by maybe 100 basis points or so, because of the actions we're taking. That's a temporary phenomenon but we think it's the right thing to do for the long term.

[Ravi Saligram, CEO at Newell Brands]

Let me tackle the second part of your question and let me start with a little bit on just SKU reduction. We're continuing to be aggressive in the sense of we started with over 100,000 SKUs. We were down to 37. Hopefully, by the end of this year, we'll be more like 30. Long term, our goal is to get to 15-20,000 SKUs. What that means is we've gotta be very focused on not just SKU reduction but new SKU generation. That's where we're putting a lot of attention, is to make sure our marketers are not spending a lot of time generating just refreshes and new SKUs and generating activity, which then further creates proliferation.

[Ravi Saligram, CEO at Newell Brands]

One of the evolutions of our innovation operating model is really on innovations that are bigger, better and more consumer, which are meaningful and also prioritizing the businesses which have the higher gross margins. Actually we're investing even more innovation on the writing side, on the writing business in totality and creating, in addition to normal line extensions, to really create a group within the writing group that is looking at breakthrough innovations, whether it's digital or with the whole new worlds of the Metaverse, et cetera. Because I think innovation is still the heartbeat of this company and part of the DNA but it has to be very much gross margin accretive, so we feel very strongly. Also second, that they are meaningful sizes.

[Ravi Saligram, CEO at Newell Brands]

Take, for instance, the ones that I just talked about, the Graco and Baby Jogger tandem. They're really meaningful innovations. They're now ramping, have very good consumer velocity since they've been introduced. A lot more focus on not only consumer insight driven and foresight driven but also customer acceptance. Another plank is to make sure it's not just at the premium end but we have the right, good, better, best offerings because in recessionary environments, that value focus becomes very important. We are putting a lot of emphasis on price pack architecture and making sure we've got the right sort of pack sizes and hitting the right types of price points. Yes, we've said, "Hey, next year we're being prudent on soft top line."

[Ravi Saligram, CEO at Newell Brands]

That doesn't mean that we're in any way backpedaling on innovation because when this macro improves, we want to be the strongest company that emerges because of all the investment we've made in capabilities, which we've done a lot and that our execution then really prowess comes to play.

[Steve Powers, Managing Director at Deutsche Bank]

Okay. Yeah, thanks for that, Ravi and thanks Chris as well.

[Operator]

Thank you. One moment for our next question. Our next question coming from the line of Olivia Tong with Raymond James. Your line is open.

[Olivia Tong, Managing Director at Raymond James]

Great. Thank you. The first question's on cash and it's just around, you know, given all the pressures that we're seeing that are now extending into next year, it creates a bit of a tough spot with respect to the dividend. Just wondering if you could update us on your priorities with respect to cash, in light of the challenges and clearly your desire to continue to rein in your debt levels. Just one quick clarification. I think you said that you expect advertising to increase in Q4. Just if you could give a little bit more detail around that'd be great. Thank you.

[Chris Peterson, President and CFO at Newell Brands]

Yeah. Let me tackle the cash question. Our focus remains consistent that we believe we've got an opportunity to generate significant operating cash flow and that's our first priority with regard to capital allocation. With that cash flow, we continue to invest in the business where we see strong return on investment projects. Typically, we're looking for 30%+ rates of return on that capital investment. Beyond that, we pay a dividend that I think we've been relatively clear that we expect to maintain as flat. We continue to expect that. There's been no change in our outlook on the dividend.

[Chris Peterson, President and CFO at Newell Brands]

In the short term, because of the increase in working capital, that I mentioned that's putting pressure on cash flow this year, we will wind up with short-term debt at the end of this year and a higher leverage ratio than typical but we view that as a temporary phenomenon and we believe that we are going to rightsized our working capital in the first half of next year. With that rightsized working capital in the first half of next year, we will use that to pay down the short-term debt, is the current plan. The ultimate goal of getting to a 2.5 leverage ratio in the mid- to long-term remains the same.

[Ravi Saligram, CEO at Newell Brands]

Yeah. On the A&P question, really it's the ratio because with the top line coming down, obviously, the ratio looks higher. I think, look, we've got two things there when we talk A&P. You've got also a lot of the displays and stuff that you need with holiday. Second, as we have new product launches, et cetera, that are supporting them. We have rightsized our A&P spending, making sure that it is against the businesses with the higher margins and where it makes the most sense.

[Olivia Tong, Managing Director at Raymond James]

Got it. Thanks. Just on the cost savings, if I remember correctly, OVID's supposed to help out quite a bit in fiscal 2023. Just thinking through, you know, how, if at all, the ability to extract savings from OVID changes, given perhaps a little bit of a change in terms of expectations for 2023.

[Chris Peterson, President and CFO at Newell Brands]

Yeah, I think if anything on the savings from OVID, we're seeing more opportunity today than we saw when we started the project and for a variety of reasons. As we've gotten into the project and modeled our transportation, as we've shifted the company from collect freight to prepaid freight and as we've diversified our port exposure, we now have a lot more levers to pull to navigate the external environment. When we started OVID, transportation costs were lower than where they are today. Even though today transportation costs are starting to get a little better from peak levels, they're still well above where we were when we started OVID.

[Chris Peterson, President and CFO at Newell Brands]

If you recall, OVID was in part about reducing the miles driven, shifting our business to have more port diversification, better service for our retail customers and take 40% of the miles driven out. The benefits in terms of transportation savings from that remain higher than when we first initiated the project.

[Olivia Tong, Managing Director at Raymond James]

Understood. Thanks.

[Operator]

Thank you. One moment, please, for our next question. Our next question coming from the line of Lauren Lieberman with Barclays. Your line is open.

[Lauren Lieberman, Managing Director at Barclays]

Great. Thanks. Good morning. It was great you gave a little bit of, you know, kind of guardrails or thinking around 2023. One of my questions is that, as you work through excess inventory, how should we think about the negative operating leverage that comes out of that? Because I know you talked about, you know, both bounce back and operating cash flow and expectation to recover gross margins. Yeah, let's just start with that, if you can help us, how do we think about the negative operating leverage that occurs with working through excess inventory?

[Chris Peterson, President and CFO at Newell Brands]

Yeah. Good point, Lauren. You're right. Because we're working through excess inventory by pulling back on the supply plan, that does create fixed cost deleveraging and that's reflected where you're seeing that is in our Q4 guidance. I think I mentioned in response to a previous question, it's about 100 basis points of pressure in Q4 from that fixed cost deleveraging associated with pulling back on the supply plan. The interesting thing is we believe we pulled back on the supply plan pretty aggressively across the whole portfolio. The self-manufactured businesses where we have the majority of the fixed cost deleveraging impact, we can pull back on the supply plan with about three months notice. The sourced businesses take about eight months of notice, so those are tougher.

[Chris Peterson, President and CFO at Newell Brands]

A lot of the self-manufactured businesses, we believe we pulled back on the supply plan and we're gonna be in a reasonably good shape by the end of this calendar year. The sourced businesses are gonna take through the first half of next year but the sourced businesses, we don't have the same fixed cost deleveraging impact. As a result, you know, we may have a little bit of negative impact next year on fixed cost deleveraging but I don't think that's going to be, you know, a material driver.

[Ravi Saligram, CEO at Newell Brands]

Because of the timing of this pullback and the way it flows through on the source businesses versus the self-manufactured businesses.

[Lauren Lieberman, Managing Director at Barclays]

Okay, that's super helpful. The 100 basis points you specified in the fourth quarter, I know we shouldn't do quarterly but I do think cadence is important. Something less than that in Q1 and then as we get into 2Q, there's just really you think there shouldn't be a fixed cost absorption issue when you get into 2Q. Is that fair?

[Ravi Saligram, CEO at Newell Brands]

Yeah, I think that's a fair assumption.

[Lauren Lieberman, Managing Director at Barclays]

Okay, great. My second question was just on, you know, the cost-cutting productivity overhead, you know, all the litany of things that Ravi you ran through on the priorities and the sort of actions you're taking. You're taking that in the context of, you know, how much progress the company has made in the last couple of years of reinvesting in capabilities and frankly, rebuilding culture. I mean, how do you manage that dynamic, right? That this is, we're right back, unfortunately, to these, the necessity to make sharp pullbacks but you've been reinvesting to create a better platform. I don't know. I'd just love to hear some color on how you're looking to manage that, you know, from an aggregate corporate standpoint. Thanks.

[Ravi Saligram, CEO at Newell Brands]

Yeah. I think that's a brilliant question. It is definitely we have to make choices. I think, Lauren, for the very reason you mentioned, it gives us the ability to do this in the sense the culture of the company is in a great place. Last year, the engagement levels we've gone from 45 to 75. We just got our engagement results two weeks ago and they were again 75. Despite everything, we're keeping the morale up and the culture. I think what we want to do is the cost reductions, to do them very intelligently and not cut muscle. We're very focused on operating models and how we go to market, how we do business, where is there duplication and so that we're actually improving how we work.

[Ravi Saligram, CEO at Newell Brands]

You know, there's always been a little tension between centrally led functions and the BUs and how do you optimize that. We've been continually working on that and I think we want to provide even greater clarity on role clarity so that we don't have duplication. International is a place where there is a lot of fragmentation and we've talked about that. Now that's something we're very heavily focused on. The first step we've already taken, we just announced, for the first time, a new country general manager for Canada, where all the BUs are there. We had situations where 44 people in Canada reported to 44 people in the U.S. and we just think that's a lot of duplication. We want that cleaned up so that there's a One Newell approach.

[Ravi Saligram, CEO at Newell Brands]

We think that there are ways of doing this where you get very efficient. Just like we've done OVID in the whole distribution side, we think there are a lot of manufacturing efficiencies from our factory side and looking at, hey, what are things that we can do there with the network. Taking OVID, moving OVID now to international, given the success in the US. We still think that there's enough there for us to do to give us a real meaningful reduction in overheads and efficiencies and I already mentioned the SKU side, without damaging the culture. Whatever we do, we're gonna do it very thoughtfully and with a whole people first mentality.

[Operator]

Thank you. Now I'm showing we have time for one more question. One moment for our next question. Now our last question coming from the line of Peter Grom with UBS. Your line is open.

[Peter Grom, Executive Director of Equity Research at UBS]

Hey, good morning or I guess good afternoon now. Hope you guys are doing well. Ravi, I just wanted to follow up on the comments you made around a recessionary environment and preparing for a softer top line year. Can you maybe just provide some context around that, particularly in light of how the top line has progressed this year and into the fourth quarter? Is there any way to quantify what a softer top line environment looks like from a core sales perspective? Would you expect to see a similar rate of decline to what we're seeing right now? Should things kind of improve? Because I know a lot of the impact right now is being driven by, you know, retail inventory destocking, which should improve.

[Peter Grom, Executive Director of Equity Research at UBS]

It also sounds like you expect consumption to become a much bigger drag from here as well. Just, you know, any thoughts on how to think about that, you know, more broadly at this point in time would be helpful. Thanks.

[Ravi Saligram, CEO at Newell Brands]

Sure, Peter. Not to be cute, we will quantify that in February. I'll give you some qualitative views if I could. I think look, the thing that we don't wanna be, it is first and foremost, it's almost impossible to quantify right now, where categories will be, where the macro will be, because you just saw the GDP in Q3. It actually was a little surprising for the country that it turned out better but it's a mixed message, so it's very tough. Our stance on it is more from a planning perspective. Don't hope that there'll be a very robust top line. Instead, make sure we are laser focused next year to deliver on number one priority. Get those inventory reduction and cash, cash. That's number one. Number two, gross margin.

[Ravi Saligram, CEO at Newell Brands]

Number three, operating margin. That's what we're day and night thinking about. The rest for us is, hey, how do you make sure of that? Don't get yourself lulled because, look, during COVID, we had that big bump up of 12.5% growth. First half, we were up 4% this year. We wanna make sure because it takes time for an organization to pivot. We think it'll be very responsible to be prudent about the top line, which then allows us to take all the actions necessary. Everything that we are gonna control, we're gonna do extremely well. The macro is something we don't control. If we take all those actions and we'll continue to innovate, then the top line, if it does better, that'll just be icing on the cake.

[Ravi Saligram, CEO at Newell Brands]

We just want to make sure that the organization understands the pivot, that it's very important to be efficient and we've gotta get those operating margins up and gotta get cash flow up. That's how we're approaching it. I think, look, we'll have another quarter to see where we are, where we can guide appropriately. Our planning stance is plan for the worst and then you can execute extremely well based on that. That's our stance. It's not being conservative. It's very tough to predict right now.

[Ravi Saligram, CEO at Newell Brands]

Okay, thank you all for joining. Thank you very much.

[Operator]

Thank you, ladies and gentlemen. That does conclude our conference call today. Thank you for your participation. You may disconnect.

Participants

Executives

• Chris Peterson, President and CFO
• Ravi Saligram, CEO
• Sofya Tsinis, VP of Investor Relations

Analysts

• Andrea Teixeira, Managing Director at JPMorgan
• Bill Chappell, Managing Director at Truist
• Kevin Grundy, Managing Director at Jefferies
• Lauren Lieberman, Managing Director at Barclays
• Olivia Tong, Managing Director at Raymond James
• Peter Grom, Executive Director of Equity Research at UBS
• Steve Powers, Managing Director at Deutsche Bank