Newell Brands Q1 2023 Earnings Report

Newell Brands EPS Results

• Actual EPS: -$0.06
• Consensus EPS: -$0.04
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: N/A

Newell Brands Revenue Results

• Actual Revenue: $1.81 billion
• Expected Revenue: $1.79 billion
• Beat/Miss: Beat by +$19.39 million
• YoY Revenue Growth: N/A

Newell Brands Announcement Details

• Quarter: Q1 2023
• Date: 4/28/2023
• Time: N/A
• Conference Call Date: Friday, April 28, 2023
• Conference Call Time: 9:30AM ET

Newell Brands (NASDAQ:NWL) is a global consumer goods 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, Elmer’s, FoodSaver, Mr. Coffee, Oster and Calphalon.

The company’s products span food and home storage, cleaning and organization, writing instruments and arts supplies, baby products, cookware and small kitchen appliances, home fragrance, and outdoor recreation equipment. Newell Brands sells through retailers, e-commerce channels and other distribution partners, serving consumers and commercial customers in markets around the world.

Newell Brands traces its origins to Newell Manufacturing, founded in 1903. The company expanded substantially through acquisitions, including the purchase of Rubbermaid in 1999 and the combination with Jarden Corporation in 2016, after which it adopted the Newell Brands name. Its operations and brands have continued to evolve as the company focuses on consumer products with broad household and everyday-use applications.

Chris Peterson serves as Newell Brands’ President and Chief Executive Officer. The company is headquartered in Atlanta, Georgia, and operates as a multinational business with products distributed across North America, Europe, Latin America, Asia and other international markets.

Newell Brands Q1 2023 Earnings Call Transcript

Key Takeaways

• The company announced a historic CEO succession, with Chris Peterson succeeding Ravi Saligram on May 16 as the first internal CEO in two decades.
• Q1 net sales fell 24% to $1.8 billion and core sales declined 18% year-over-year, resulting in a normalized diluted loss of $0.06 per share.
• The second wave of Project Ovid centralized distribution and transportation, significantly improving fill rates, reducing delivery times and delivering early cost efficiencies.
• Under Project Phoenix, the company reorganized into three segments, launched a unified sales model and centralized its supply chain center of excellence, targeting $220–$250 million in annualized pretax savings.
• Operating cash flow improved by nearly $200 million versus last year in Q1, driven by a $150 million inventory reduction, and the company reaffirmed its full-year operating cash flow guidance of $700–$900 million.

Presentation

[Operator]

Good morning, welcome to Newell Brands First Quarter 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. 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 call 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 first quarter earnings call. On the call with me today are Ravi Saligram, our CEO; Chris Peterson, our President; and Mark Erceg, our CFO. Before we begin, I'd like to inform you that during the course of today's call, we'll 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.

[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 that were furnished to the SEC. Thank you. Now I'll turn the call over to Ravi.

[Ravi Saligram, CEO at Newell Brands]

Thank you, Sofya. Good morning, everyone. Welcome to our first quarter call. I'll keep my remarks brief as Chris and Mark will take us through our results and outlook for the balance of the year. This is my last earnings call with Newell Brands. As many of you know, in February, we announced that I'll be retiring on May 16. Chris will take over as the next CEO of the company. This is a historic event for us, as Chris will be the first internal CEO successor in Newell's recent history. In fact, in the last two decades. It's a testament to a well-thought-out, well-planned succession planning process. Over the past several months, I've partnered closely with Chris to ensure a seamless, smooth, and orderly transition, as well as a successful execution of Project Phoenix.

[Ravi Saligram, CEO at Newell Brands]

I've also spent time in our international markets, and I'm encouraged by the long-term opportunities for our key brands. I'm confident that Chris, along with the world-class management team we've assembled over the past couple of years, will get us through this difficult environment and take Newell to the next level. While the macro environment has put considerable pressure on our business, I'm optimistic about the future of Newell Brands. Over the past several years, we've come together as One Newell. We are still in the early stages of truly leveraging the scale of the company. We have a strong world-class executive leadership team with great brands that consumers love. We're both e-commerce and omnichannel pros. We have excellent customer relationships and are reigniting the processes and passion to drive meaningful innovation.

[Ravi Saligram, CEO at Newell Brands]

Our team has done a superb job on systematically reducing complexity, and we're gaining momentum on driving operational excellence through Project Ovid and automation. Our talented employees are our number one asset, and we're grateful for their continued efforts, resilience and dedication, as well as their support and execution of the change agenda we've implemented as part of Project Phoenix. Phoenix is not just about efficiencies and cost savings. It is truly a new operating model. I'd like to thank our employees for their trust in me and thank the entire leadership team. It has been a distinct honor and privilege to lead the company over the last several years. I'm confident that our best days are truly ahead of us. Onwards and upwards, and I now turn over to Chris.

[Chris Peterson, President at Newell Brands]

Thank you, Ravi. Good morning, everyone. First quarter results were largely in line with our expectations. As anticipated, this was a very difficult period for the company, with top and bottom line under significant pressure. The headwinds Newell faced in the back half of 2022 from normalizing category trends, constrained consumer spending in discretionary categories, retailer destocking, fixed cost deleveraging, inflation, and foreign exchange persisted into Q1. There were several bright spots, including stronger cash flow performance relative to last year. During Q1, we also continued to build operational excellence across the organization and made meaningful progress operationalizing the distribution and transportation benefits associated with Project Ovid and implementing Project Phoenix. Let me provide additional perspective on both initiatives.

[Chris Peterson, President at Newell Brands]

As you may recall, on February 1st, we implemented the second go live wave of Project Ovid across the remaining food categories as well as the writing, outdoor and recreation, and commercial businesses. The conversion has been very successful and our distribution and transportation organization is now fully centralized. We are currently operating in the new go-to-market model, utilizing both East Coast and West Coast ports via a nationwide multi-node network of mixed distribution centers, including the two new DCs we stood up in Pennsylvania and North Carolina. While it's still in the early days, we are beginning to realize benefits from the new model, and in the first quarter, we meaningfully improved fill rates relative to last year, reduced delivery times, and have a clear line of sight to cost efficiencies.

[Chris Peterson, President at Newell Brands]

First quarter represented a crucial period in the implementation of Project Phoenix, which is expected to simplify and strengthen the organization by leveraging our scale to further reduce complexity, streamline our operating model, drive operational efficiencies, and unlock significant savings. Although there is certainly a lot more work ahead of us, we made progress on key pillars of Project Phoenix during the first quarter. First, we transitioned the company into the new operating model organized into three segments: Home & Commercial Solutions, Learning & Development, and Outdoor & Recreation. This should enable us to better leverage the scale of the organization, unlock new opportunities for growth while enhancing mobility for our talented employees. Second, we moved to a One Newell sales model for our top four customers to harness the scale of our portfolio while building win-win enduring partnerships with our top customers.

[Chris Peterson, President at Newell Brands]

We are bringing a unified approach to selling our products to our major customers to simplify customer interactions, significantly improve their experience, and strengthen our position as a best-in-class partner. We are in the midst of implementing a One Newell go-to-market approach across all key international geographies, which should allow us to operate more efficiently, drive incremental distribution gains, and improve our agility. We moved to a One Newell go-to-market approach in Canada last year. In January of this year, we did the same in Latin America, Australia, New Zealand, and Japan. We expect to complete EMEA and all other markets by the end of this year. We have centralized manufacturing into Newell's supply chain center of excellence. We are excited about the opportunity to turn the company's manufacturing scale into a competitive advantage and to optimize our global manufacturing network.

[Chris Peterson, President at Newell Brands]

We continue to believe that a unified global supply chain organization will drive significant cost and service efficiencies, improve our supply chain resiliency, further enhance the company's technical capabilities, strengthen our culture of customer connection and collaboration, and position us to become a best-in-class, scaled, general merchandise supplier to our retail partners. As we continue to tightly manage costs and assess all aspects of our spend, we are also analyzing our real estate footprint, particularly given the shift toward the hybrid work environment. We closed three offices during the first quarter and expect additional office closures throughout the upcoming years. We are on track to achieve the planned headcount reduction associated with Project Phoenix, along with the annualized pre-tax savings in the $220 million to $250 million range when fully implemented.

[Chris Peterson, President at Newell Brands]

Careful planning and consideration have gone into every decision relating to our employees, with communication to the impacted individuals either already complete or in process, depending on the market. The past several months have confirmed our cautious stance on the macro environment and the consumer for the balance of this year, particularly as it relates to discretionary spending. Our views are predicated upon macro indicators such as slowing retail sales, rising household debt, and persistently high, although moderating inflation on essentials such as food, energy, and housing. We expect these factors, along with the rollback in government stimulus spending, to restrict the share of consumers' wallets that's directed toward discretionary purchases. Elevated prices on everyday goods are not only weighing on consumption in the U.S., but we're observing similar trends in international markets, particularly Europe.

[Chris Peterson, President at Newell Brands]

We are seeing continued normalization in demand across home-based categories that benefited from stay-at-home trends during the pandemic. Given the longer purchase cycle for many of these products, we expect this behavior to persist through the year. Retailers have continued to pull back on general merchandise inventory levels, we expect this behavior to persist in the near term. As you may have seen earlier this week, one of our customers, Bed Bath & Beyond, filed for bankruptcy protection and indicated they may pursue a double path of potentially selling off their assets. While we typically do not comment on individual retailers, given they were an important customer for Newell Brands in 2022, I'll shed some light on where we stand. They accounted for less than 2% of Newell sales in 2022.

[Chris Peterson, President at Newell Brands]

Given their situation, we took steps last year to largely eliminate our credit exposure. While we have minimal risk on the receivables front due to the proactive actions we've taken, we do expect this to be a slight headwind for Newell as they liquidate inventory and shoppers migrate to other retailers. While there's a fair amount of uncertainty surrounding the macro backdrop, with Q1 results largely in line with our expectations, we are reaffirming our outlook for 2023, although we now expect the company to be toward the lower end of the guidance range. We continue to expect this to be a challenging year for the company and remain committed to stabilizing Newell's financial performance while driving foundational improvement. Our ultimate goal is to return the company to sustainable and profitable growth as macros improve.

[Chris Peterson, President at Newell Brands]

We are laser-focused on delivering against the five priorities we laid out on last earnings call. First, strengthening Newell's cash flow and balance sheet by continuing to right size inventories, carefully managing the forecasting process, and staying close to the evolving consumer and customer trends. Second, driving gross margin improvement by accelerating FUEL productivity savings, further advancing our automation initiatives, operationalizing Project Ovid distribution and transportation benefits, and pricing for currency and inflation. Third, driving overhead savings through Project Phoenix and tight spending controls to offset the impact of incentive compensation reset to more normal levels and wage inflation. Fourth, continuing SKU count reduction progress along with other simplification initiatives. Fifth, operationalizing the new company structure to enable faster transformation progress. As Ravi mentioned, over the past several months, he and I have partnered closely to ensure a smooth transition in mid-May.

[Chris Peterson, President at Newell Brands]

At the same time, I along with the rest of the leadership team, have embarked upon a refresh of our strategy, which entails a full assessment of where Newell stands versus best-in-class competition on the key capabilities required to win in this industry, an updated and integrated set of where to play and how to win choices, an assessment of the talent and culture required to enact the strategy refresh, as well as an evaluation of the capital allocation priorities required to support the new strategy. We are on track to complete this work and share our thoughts in the next few months.

[Chris Peterson, President at Newell Brands]

While we continue to face a very challenging macroeconomic environment, I am confident that our portfolio of leading consumer brands and talented employees will allow us to further strengthen the company in the years ahead as we sharpen our strategy, optimize our cost structure, and fully leverage the scale of the company. Before turning over to Mark, on behalf of our entire organization, I would like to wish Ravi well in his retirement and thank him for his leadership, partnership, and dedication over the past several years. I'll now hand the call over to Mark.

[Mark Erceg, CFO at Newell Brands]

Thanks, Chris. Good morning, everyone. Let's jump straight into our Q1 results, which were largely consistent with going in expectations, with core sales and normalized earnings per share both landing within guidance, albeit at the lower end of the range. Net sales contracted 24% year-over-year to $1.8 billion, reflecting an 18% decline in core sales, a 2% headwind from currency, and a 4% impact from the divestiture of the CH&S business and certain category exits. While we are clearly not happy with an 18% decline in core sales, it does bear mentioning that this was against a particularly difficult base period comparison since core sales grew 6.9% in Q1 of 2022 and 20.9% during Q1 of 2021. Therefore, on a stacked basis, core sales were up versus 2019 levels.

[Mark Erceg, CFO at Newell Brands]

Newell's normalized operating margin contracted 820 basis points versus last year to 2.4% as normalized gross margin declined 410 basis points versus last year to 27.1%. Fixed cost deleveraging due to a softer top line along with inflation, including carryover inflation costs from last year, were the largest drivers of margin pressure in Q1. These factors more than offset the favorable impact from pricing, Project Phoenix, and our FUEL productivity efforts, which are tracking slightly ahead of our going-in expectations. Net interest expense rose $9 million versus last year to $68 million, primarily due to increases in debt and interest rates, and the normalized tax benefit was $1 million, all of which netted out to a normalized diluted loss of $0.06 per share for the quarter.

[Mark Erceg, CFO at Newell Brands]

From a cash flow standpoint, operating cash was a use of $77 million during the quarter, which while still negative, was an improvement of nearly $200 million versus last year. Inventory was a big part of the improvement, coming in $150 million lower than a year ago. Importantly, while this is good progress, we need to drive inventory levels much lower while still maintaining or increasing order fill rates. Consistent with this, it is worth noting that in-transit inventory at the end of Q1 was approximately $250 million below year-ago levels. This suggests two things. First, we are doing a better job of matching raw material and sourced finished good orders and internal manufacturing production to actual customer order patterns.

[Mark Erceg, CFO at Newell Brands]

Second, the significant inventory reduction we are expecting and counting on over the balance of the year is already working its way through the system. The company's leverage ratio was 5.7 times at the end of Q1, and we don't expect it to be below five times till the end of the year. Anticipating this, last month, we secured a temporary reduction in the interest coverage ratio and our revolving credit agreement to 3 times from 3.5 times for the next four quarters. This amendment, we believe, provides the company with sufficient flexibility to navigate through this challenging period. Moving on to our second quarter outlook, we have assumed the following. Net sales of $2.13 billion to $2.24 billion, with core sales down 10% to 14% and a 1% to 2% headwind from currency and certain category exits.

[Mark Erceg, CFO at Newell Brands]

Normalized operating margin is expected to remain under significant pressure in Q2 due to the same headwind that weighed on Q1, as well as unfavorable mix due to a shift in some writing orders from Q2 to Q3 related to back-to-school activity. Taking all this into account, we are forecasting Q2 normalized operating margin of 6.5% to 8%. We expect a step-up in interest expense and a high teens tax rate. Normalized earnings per share are forecasted to be $0.10 to $0.18.

[Mark Erceg, CFO at Newell Brands]

For the full year, we are reaffirming our 2023 outlook with net sales of $8.4 billion to $8.6 billion, driven by a core sales decline of 6% to 8% and a nearly 3% headwind from currency, divestiture of the CH&S business, and certain category exits. Normalized operating margin is expected to be 9.6% to 10.1% or flat to down 50 basis points versus last year, as gross margin improvement is more than offset by overheads, despite $140 million-$160 million of anticipated pre-tax savings from Project Phoenix in 2023. For 2023, we are reiterating our normalized earnings per share guidance range of $0.95-$1.08, which includes a high teens tax rate as well as a step up in interest expense.

[Mark Erceg, CFO at Newell Brands]

As Chris indicated earlier, we now expect our top and bottom line results to come in towards the low end of the range as we are incrementally more cautious on the operating environment as well as consumer discretionary spending. We continue to expect significant year-over-year improvement in operating cash flow, driven primarily by a reduction in working capital. Specifically, we anticipate $700 million to $900 million of operating cash flow, inclusive of $95 million to $120 million of cash payments related to Project Phoenix. At the midpoint of our range, free cash flow productivity is comfortably above 100%. With Q1 actuals now in hand, along with our Q2 and full year guidance, it becomes self-evident that we are expecting a much stronger top and bottom line during the back half of the year versus the front half.

[Mark Erceg, CFO at Newell Brands]

Given this reality, we thought it'd be helpful to provide some specific reasons why we believe our business results should improve in the second half of the year. First, from a macroeconomic standpoint, we expect that FX pressures on profits should ease, inflation should be much less pronounced, and the massive amount of general merchandise trade destocking we have been incurring, starting with Q3 of last year, should finally slow down. Second, as it relates to our own underlying business dynamics, our second half, historically, with the exception of last year, when significant destocking began to manifest itself during the third quarter, has represented more than half of total company sales, which will help with fixed cost absorption. As I'm sure you're all aware, starting with the third quarter, our base period comps get much easier.

[Mark Erceg, CFO at Newell Brands]

Based on back-to-school order patterns, we now expect about a point of sale to move from Q2 to Q3 this year, which is one of the reasons why our back half mix should be more favorable. We have several corporate-driven initiatives already in flight, which we believe will disproportionately benefit the second half of the year. We are on track to have our biggest productivity year ever on two fronts. As it relates to gross margin, where we are on pace to save over 4% of COGS due to our FUEL initiative, with the savings being slightly back half weighted. Project Phoenix, which Chris has already commented on, should understandably have a bigger positive impact on overheads during the second half of the year. We just completed an in-depth analysis of our domestic business at a SKU level.

[Mark Erceg, CFO at Newell Brands]

Our extensive analysis clearly showed that additional pricing is required to mitigate the impact of continuing inflation on some categories and to fix the underlying structural economics on products that are, because of the unprecedented level of inflation we have sustained in recent years, not generating an appropriate level of return on a fully loaded basis. We believe it's imperative that we address these issues now, so they don't perpetuate or get worse. Thus, we are now expecting to take an incremental U.S. pricing action across roughly 30% of our U.S. business, largely concentrated in the Home & Commercial Solutions segment in the third quarter. Absent this intervention, we will not be able to invest in the consumer understanding, brand building, and innovation capabilities our consumers and retail partners expect.

[Mark Erceg, CFO at Newell Brands]

Based on these reconciling factors, we believe our guidance, including the associated front and back half splits, is appropriate and reasonable and reflects progress on our multi-year journey to create meaningful levels of sustainable shareholder value going forward. Operator, if you could, please open the call to questions.

[Operator]

Yes, sir. Ladies and gentlemen, at this time, if you have a question or comment at this time, please press star one one on your telephone keypad. As a reminder, in order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Peter Grom from UBS. Your line is open, sir.

[Peter Grom, Equity Research Analyst at UBS]

Hey, thanks, operator, and good morning, everyone. Chris, I guess I just wanted to get your perspective on just kind of underlying category growth, but more in the context of really what's changed since we last spoke in February. You know, you discussed discretionary spending pressures, but, you know, it seems like those were already there or occurring back in February. You know, just any commentary and just in terms of what's really, you know, changed where it's really gotten worse. Then, you know, I appreciate all the building blocks, you know, around hitting the back half guidance. You know, if we do go into a recession, you know, is that outlook still feasible?

[Chris Peterson, President at Newell Brands]

Sure. Thanks, Peter. Good morning. From a consumer and sort of macro environment, as I mentioned in the prepared remarks, really what we're seeing is continued pressure on the consumer in discretionary and durable categories. That's a function of inflation on food, housing, and energy, causing the consumer to prioritize more essential items and deprioritize spending on durable and discretionary categories. Coupled with that, many of our categories have longer purchase cycles, and when stimulus money came into the market, a year or two ago in a big way, a lot of consumers bought product categories that effectively took them out of the market for a period of time.

[Chris Peterson, President at Newell Brands]

I don't think there's a meaningful change on that fundamental dynamic, which is why we're maintaining the range for the year. I will say that, you know, I guess, in terms of what's changed in the last two months since we talked, specifically, we did come in at the lower end of our guidance range, -18% on core sales growth. That was really driven by Outdoor & Recreation, which got off to a slower than expected start to the season, primarily due to wet and cold weather in the western part of the country. We've seen, as I mentioned in the prepared remarks, one of our major retailers declare bankruptcy, that we do expect to have a temporary sort of disruption in the market. We expected that on the year, but that the timing was not certain.

[Chris Peterson, President at Newell Brands]

From a retailer de-stocking standpoint, I think, you know, in our first quarter results, probably of the -18% core sales growth that we reported, about half of that was underlying sort of consumer dynamics, and the other half of that was really retailer de-stocking, roughly. You know, that's part of the reason why we think that retailer de-stocking we're largely through, although we do expect it to continue to have an impact on Q2. We think by the time we get to sort of mid-year, you know, that will largely be behind us.

[Peter Grom, Equity Research Analyst at UBS]

That's super helpful. Just to clarify that last point. Around roughly half of the -18 was related to retail de-stocking and roughly half was just kind of what you're seeing in terms of underlying demand?

[Chris Peterson, President at Newell Brands]

That's right. That underlying demand, I would say, is, you know, as a result of the base period, it's a result of the pressure on consumer wallets, and normalization of some of the categories from COVID peak levels. That's accurate.

[Peter Grom, Equity Research Analyst at UBS]

Great. Thanks so much, Chris. I'll pass it on.

[Operator]

Thank you. Your next question or comment comes from the line of Kevin Grundy from Jefferies. Mr. Grundy, your line is open.

[Kevin Grundy, Managing Director at Jefferies]

Great. Can you guys hear me okay? There we go.

[Chris Peterson, President at Newell Brands]

Sure.

[Kevin Grundy, Managing Director at Jefferies]

Okay.

[Chris Peterson, President at Newell Brands]

Good morning, Kevin.

[Kevin Grundy, Managing Director at Jefferies]

Cut off. Hey, good morning, guys. Sorry about that. My line kind of went dead for a moment. I'd like to pivot to cash flow. Better versus last year, 1Q is, of course, sort of a seasonally light quarter and typically tends to be a cash use for the company. A few questions, all pertinent. Number one, how did cash flow come in relative to your expectations for the quarter? Number two, what's kind of the visibility or the level of confidence you have on the $700 million to $900 million? I think the comment was around guidance broadly is appropriate and reasonable. You know, I'd sort of push a little bit and say, is it conservative?

[Kevin Grundy, Managing Director at Jefferies]

Then lastly, and certainly importantly, given where the dividend yield is, maybe just some updated thoughts on ability to fund it. I think when you kind of look at the guidance a little bit and look at where CapEx could be, if you kind of come in at the low end of the range, you're kind of right there. There's not a lot of wiggle room to fund the dividends. I think that. Understanding it's a board decision, I think your updated thoughts there would be appreciated. Thank you for all that, guys. I appreciate it.

[Mark Erceg, CFO at Newell Brands]

Let me jump in and help with the cash flow piece, then Chris can talk about the second part of your question. In Q1, you're right, you know, it's always a cash take quarter, we did have really good progress there, basically being up about $200 million year-over-year. If you wanna get into the bridge items that relate to that, the biggest part of it was better working capital performance. That was about $400 million better. Almost all that was driven by inventory. We did have a lower incentive comp payment, cash payment for incentive comp for management. That was about $100 million. Lower operating income was probably a $200 billion differential negatively year-over-year.

[Mark Erceg, CFO at Newell Brands]

We had several items that combined for another $100 downturn, which was the Phoenix restructuring, the Brazil tax payment, and some higher cash interest. If you do that bridge, you'll find yourself comfortably at that $200, which was the improvement that we saw. If you think about the full year, again, it's gonna be a story of basically working capital improvement. Because if you look at the operating cash flow from the prior period, it was down roughly $300. If you take the midpoint of our $700 million to $900 million range, that puts you at $800 million. We're basically looking to bridge about $1.1 billion of improvement. Effectively, all that comes from working capital.

[Mark Erceg, CFO at Newell Brands]

I mean, operating income is about $100 million, you know, take year over year. The working capital is the $1.1 billion positive movement, with inventory being about 700 of that, and then AP and AR accounting for the balance of the differential, with AR being a little bit of a hurt and AP being a pretty big size help. You know, from where we sit right now at the end of Q1, we're expecting another $400 million-$500 million to come out of inventory throughout the course of the year. Our inventory performance in Q1 exceeded our expectations. As you heard in my prepared remarks, the in-transit inventory is already $250 million down versus the prior period. We feel pretty good about the operating cash flow elements.

[Mark Erceg, CFO at Newell Brands]

We're watching it very closely, but we have a high degree of confidence in it.

[Chris Peterson, President at Newell Brands]

Kevin, maybe I'll just take the question on the dividend. To your point, the operating cash flow range, which we kept unchanged at $700 million to $900 million on operating cash flow, is sufficient to fund the current year CapEx and the dividend and have a small amount of debt paydown. That being said, as I mentioned in my prepared remarks, we are taking as part of the strategy a refresh. We are gonna look at the capital allocation strategy for the company going forward. Certainly, the dividend is going to be part of that capital allocation strategy look.

[Chris Peterson, President at Newell Brands]

We haven't made any conclusion on that yet, but the strategy work will incorporate a view on that, and we will share that when appropriate, once we've gone through discussion with the board.

[Kevin Grundy, Managing Director at Jefferies]

Thank you very much. I appreciate the color. Bye.

[Operator]

Thank you. Your next question or comment comes from the line of Chris Carey from Wells Fargo. Mr. Carey, your line is open.

[Chris Carey, Equity Analyst at Wells Fargo]

Hi, good morning.

[Chris Peterson, President at Newell Brands]

Morning, Chris.

[Chris Carey, Equity Analyst at Wells Fargo]

You know, just from a gross margin standpoint, right? Seeing a little bit of a step up sequentially, but obviously still under a lot of pressure. You know, you're looking at taking pricing in the back half of the year now, which should give a little bit of a lift. Can you just clarify, you know, how you expect the gross margin to trend sequentially? Then just on the new pricing, you know, I'm sorry if I missed it, but, you know, how are you factoring the macro backdrop? You know, if the consumer starts to get weaker, do you still go through with the program? Are you gonna need to offset it with any incremental promotions if that environment seems to play out from a macro standpoint?

[Chris Carey, Equity Analyst at Wells Fargo]

Just, you know, how are you thinking about the sensitivity of this new pricing, you know, plan that you have for the back half of the year? Thanks on the gross margins and the pricing.

[Mark Erceg, CFO at Newell Brands]

Yeah. Let me help you on the gross margin, and I'll even help you on the operating margin line as well, because obviously the two are highly correlated. you know, it's not lost on us that the guidance that we're providing is kind of a tale of two halves. If you look at the operating margin in the first half, you know, we're calling for it to be mid-single digits, and then for the back half, we're calling for the operating margin to be, you know, in the low teens. That obviously implies a big reversal from the first half to the second in both op margin and gross margin.

[Mark Erceg, CFO at Newell Brands]

If you look at all the elements that we have in flight, I think you'll see that the splits we have are reflective of what we're seeing on the underlying trends of the business itself. For example, if you look at like Phoenix, if you look at, you know, the FUEL productivity initiatives, and if you look at the net pricing that we discussed, roughly 60% of the benefit that comes from those three programs will fall into the second half of the year. Similarly, if you look at inflation in FX, roughly 70% of the hurt from those two things falls in the first half. Of course, you have to look at the comps on the base periods. In the first half, we're going up against +4 in the prior periods.

[Mark Erceg, CFO at Newell Brands]

In the second half, we're going against minus 10s. Obviously, that's a big factor as well. From a trade destocking standpoint, we think, you know, most of our large customers are at their target weeks of coverage now. We think there might be a little bit more that kind of comes out through the second quarter, but at that point, we think we're in pretty good regard as it relates to that. We talked about normal business seasonality, where the second half historically has been just at a larger dollarized value than the, than the first half. We talked about the shift that we see in back to school from Q2 to Q3.

[Mark Erceg, CFO at Newell Brands]

Finally, I guess I'd offer that in Q1, we did have some additional E&O charges as we worked down our inventory levels, and that actually cost us a couple pennies on the quarter. If you really look at the underlying pieces that, you know, drive the first half, second half splits on gross margin as well as operating margin, we think they're reasonable and appropriate. On the pricing piece, I know Chris wanted to add a few thoughts on.

[Chris Peterson, President at Newell Brands]

Yeah, on the pricing piece, one of the things that we did, and actually, when Mark came in, we initiated this work, was because we've been able to reduce the company's SKU count, from 102,000 when we started the SKU count reduction effort at the end of 2018 to 28,000, last year, we initiated a look at profitability and inflation impact at the SKU level, in the U.S. business. What came out of that work was that there was a number of SKUs that we had in the U.S. business, that were structurally challenged and where we hadn't fully priced, for inflation.

[Chris Peterson, President at Newell Brands]

We are announcing pricing in the U.S. that will be effective in the third quarter. It's on about 30% of our U.S. business, as Mark mentioned. It will be effective in the third quarter. Where we're taking the pricing, it's going to be, you know, sort of a range between high single-digit and low double-digit percentages. We think it's appropriate and warranted because we haven't fully priced for inflation on these SKUs.

[Chris Peterson, President at Newell Brands]

I'll also mention that this is a good example of simplification helping us, because if we had tried to look at the profitability by SKU three years ago, it would've been virtually impossible for us to do it because of the number of SKUs that we have. We're now getting much better visibility at a much more granular level that's allowing us to go after this. We think it's warranted. We think that it's the right thing to do for the long-term health of the business. Of course, we're gonna monitor the trends carefully as the pricing gets put into the market with regard to the consumer response.

[Chris Peterson, President at Newell Brands]

Broadly speaking, in our guidance, we have not assumed that the pricing adds to the top line in the back half. We've largely assumed that the pricing is offset with volume loss. This is more about improving the structural economics of this business than it is about driving short-term top-line growth.

[Chris Carey, Equity Analyst at Wells Fargo]

Thanks for all the perspective.

[Operator]

Thank you. Your next question or comment comes from the line of Andrea Teixeira from JPMorgan. Ms. Teixeira, your line is open.

[Andrea Teixeira, Managing Director and Senior Equity Research Analyst at JPMorgan]

Thank you very much, and good morning. Can you comment on what are you hearing on the back to school? I guess, you mentioned, Mark, you mentioned that, it seems like you're seeing normalized inventory levels and Chris, you said the same with the retailers. I'm just thinking in terms of the timing of shipments as well, because I think it moved, as you said, last year. If you can comment on both, the writing division as well as the outdoor going to peak season. With that said question, what does that mean embedded in your guide for gross margin? I'm assuming obviously those two are higher margins, businesses.

[Andrea Teixeira, Managing Director and Senior Equity Research Analyst at JPMorgan]

As we think about what's embedded in your guide in terms of the resin, I understand that you don't buy the resin directly, but you will eventually get the benefit from that as you lap the, you know, the couple of months of, in this case, in the case of resin, is a substantial decline more than a year ago. I was wondering if you're starting to see that benefit and that's embedded in your guide and if that anything has changed to better or worse, since you got the last. Thank you.

[Chris Peterson, President at Newell Brands]

Very good. All right. Thanks, Andrea. I'll try to hit the business unit questions and then maybe give let Mark hit the resin question. On the writing business and back to school, we feel very good. In the first quarter, writing was effectively flat from a core sales standpoint. Despite the company being down 18% in Q1, writing was not down. That's important because writing is our most profitable business. And writing being flat in Q1 means that we're meaningfully up versus the 2019 base period because we have built market share during that period from 2019 until today. As we head into back to school, we're just in the sell-in period.

[Chris Peterson, President at Newell Brands]

As you know, we don't really get a read on the consumption of back to school until kind of the July, August, September period. I will say from a sell-in perspective, retailers are planning for a pretty normal back to school year. I think in general, people are expecting back to school to be relatively consistent with last year's back to school. We feel very good about our plan heading into the back to school period because if you recall, last year we had a little bit of supply challenge on some subsegments of our business. This year we do not have that challenge, and we are fully available from a supply standpoint and recovered.

[Chris Peterson, President at Newell Brands]

We also already have visibility to the vast majority of the back to school seasonal orders, and we feel very good about our in-store display positioning in the marketplace with the leading retailers. We are optimistic as we head into the season. Final thing I'll say on back to school, and this is true for a lot of the seasonal businesses that we're seeing in our business, is that because the supply chain has improved so rapidly, retailers are now not ordering seasonal inventory as early as they did in the past.

[Chris Peterson, President at Newell Brands]

Last year, for example, if retailers wanted back to school inventory in February, March, April, to try to secure inventory for the season, this year we're seeing retailers say, "No, we want it later in the season because we don't need it that early." That's why we mentioned in the prepared remarks, we expect the shipments of back to school to go back to more normalized levels and much of the shipments to occur in May, June, July. That's true on the back to school business. It's also true on the other seasonal categories. On Outdoor and Rec, it's a little bit of a different situation. Outdoor and Rec is not one of the higher gross margin parts of the company.

[Chris Peterson, President at Newell Brands]

The gross margin on Outdoor & Recreation is lower than company average. Outdoor & Recreation is the category that got off to a very slow start. As I think I mentioned in one of the previous questions, the Outdoor & Recreation was down from a core sales growth standpoint in the high 20s in the first quarter. Significantly below the company average of down 18%. That largely is due to a comping a very high base period, but also due to a slow start to the season because of the weather. That was really the only business in Q1 that came in slightly below or below what we were expecting on the top line.

[Chris Peterson, President at Newell Brands]

It's too early to declare anything with regard to the season. The season for Outdoor & Recreation typically gets really going kind of May through July is sort of the big season. What we're seeing so far is retailers saying, "Hey, because of the slow weather, can you hold up the shipments in because we don't need the inventory quite as fast." Too early to declare how the season overall will wind up.

[Andrea Teixeira, Managing Director and Senior Equity Research Analyst at JPMorgan]

As relates to your question on resin. Resin's been a help for us since the third quarter of last year, and we expect it to remain so for all of 2023. When we think about COGS inflation in totality, you know, we expect it to be low single-digit for 2023 versus what was high single-digit in 2022. Super helpful. Thank you.

[Operator]

Thank you. Your next question or comment comes from the line of Bill Chappell from Truist. Mr. Chappell, your line is now open.

[Stephen Lengel, Equity Research Associate at Truist Securities]

Hey, good morning. This is Stephen Lengel on for Bill Chappell. Thank you for taking our question.

[Chris Peterson, President at Newell Brands]

Morning, Steve.

[Stephen Lengel, Equity Research Associate at Truist Securities]

Hey, good morning. On the gross margin side, thank you for some of the color you guys gave. Sorry if I missed this, but you understandably left the guidance unchanged, but kind of mentioned some FUEL savings, from Phoenix. Can you kind of talk more about your freight assumptions and how those have changed over the course of the past few months? Kind of how do you see it evolving over the next 12 to 18 months?

[Chris Peterson, President at Newell Brands]

Yeah, we are seeing a noticeable drop in transportation cost, and it's really driven by a couple of things. I'll parse it into sort of three parts. First is the ocean freight market for inbound freight has dropped dramatically, back to close to pre-pandemic levels. I think as I've talked before, the contract years for ocean freight go May first to May first, and we're seeing we've now concluded the negotiations for this upcoming contract year, and we're seeing ocean container costs back close to pre-pandemic levels, which is a noticeable retreat from where they were last year and the year before. That is a big positive. The second part of this is trucking costs in the U.S.

[Chris Peterson, President at Newell Brands]

What we're seeing there is full truckload cost is coming down significantly as diesel fuel costs are coming down, as well as demand for full truckload capacity is coming down in the US market. That's another sort of tailwind. Interestingly, we're not seeing the same thing on less than truckload freight, which is remaining sort of stubbornly high. The third impact that's driving our transportation costs down is the Ovid implementation. As we've implemented Ovid and gone to the mixed distribution centers, we are seeing a meaningful opportunity for us to move from less than truckload shipments to full truckload shipments.

[Chris Peterson, President at Newell Brands]

It takes work to operationalize that, we're making very good progress with some of our top retailers at driving big shift from less than truckload into full truckload. For perspective, full truckload costs about half the amount for a similar volume versus less than truckload. If we can convert the business from less than truckload to full truckload, for the portion of the business we convert, transportation cost goes down by 50% through that effort. That's sort of where we are on transportation costs broadly.

[Mark Erceg, CFO at Newell Brands]

You mentioned the FUEL productivity program. I just wanted to offer a few additional thoughts on that because it's been one of the areas that's really impressed me when I've been joining up here at Newell Brands. If you look back at 2019 and 2020 as an example, we spent $250 million averagely on CapEx during those two years. In those two years, we spent a little less than 20% of our capital on productivity projects. If you look at 2021 and 2022's capital program, which was roughly $300 million, over 40% of our capital was spent on productivity projects. The FUEL program has really started to ramp up. You're seeing that through increased automation.

[Mark Erceg, CFO at Newell Brands]

The move that we made as part of Project Phoenix to basically bring the supply chain management to the center, following on the success of Ovid, gives us huge opportunities. At this point, across our 49 plants, 90% of those are single node sites. We have an opportunity to manage that much more effectively across the entire Newell network. If you look at the $4 billion of direct and source finished goods, you know, only 60% of that right now is single source, right? 60% single sourced, 25% is dual sourced, and about 15% is dual qualified. We have a tremendous opportunity going forward, and we only see the FUEL productivity savings just increasing over time as we sit here today.

[Stephen Lengel, Equity Research Associate at Truist Securities]

Awesome. Thank you guys very much.

[Operator]

Thank you. Your next question comes from the line of Filippo Falorni from Citi. Mr. Falorni, your line is open.

[Filippo Falorni, VP of Equity Research at Citi]

Everyone, just a quick follow-up on pricing. Firstly, what has been the reaction from your retail partner to your additional price increases? Have you also seen your competitors take prices up, or are you assuming they're gonna take prices up? That's the first question. Then, longer term, just in general, can you give us some sense on the path to operating margin recovery to the mid to high teens? Clearly, you're doing a lot of progress on the cost savings front, but the external environment is essentially removing a lot of those benefits. What do you think is the path to get to those targets? Is your timeline delayed because of the macro environment? Can you give us some sense on the timing there? Thank you.

[Chris Peterson, President at Newell Brands]

Okay. Let me start with the pricing. We are, we've just announced or just announcing the pricing as we sit here today in the U.S. It's too early to give a full view of the retailer reaction. What I will say is that, you know, the pricing that we're putting in place effectively today, which is about 30% of our U.S. portfolio that we're pricing on, is cost justified. It is on the part of the business where we haven't fully priced for inflation. In the past, as we've put pricing in over the last several years, we've generally seen competition largely follow the pricing that we put in. Of course, we don't know what they're gonna do on this one.

[Chris Peterson, President at Newell Brands]

The reason that we believe that the competition has largely followed is because they're seeing the same inflation, cost pressure as we are. Frankly, we've been focused on not overpricing given the macro environment from a consumer standpoint, because we wanted to offer the consumer great value. We're encouraged that we're not needing to take pricing on 70% of the U.S. portfolio because we think the pricing that we've historically put in has already gotten us sort of caught up. So it's this 30% of the portfolio where we haven't fully priced for inflation and where the business is structurally challenged in some cases, that we believe we really don't have a choice. We will monitor the situation. We as always work with our retailers on implementation of this.

[Chris Peterson, President at Newell Brands]

I think the retail environment in general has been relatively receptive, when you have a cost-based story, to accepting pricing, as you've seen from many of the other consumer product company reports that have come out over the past week or so. From a longer-term perspective, on operating margin, we continue to believe that we've got a significant opportunity to improve the operating margin of this company. We think that the opportunity is largely gross margin based, which is why we've got the fuel productivity savings going, why we've got the Ovid initiative going, the automation initiative, and we're attempting to drive gross margin accretive innovation to help us mix up.

[Chris Peterson, President at Newell Brands]

We also think we've got continued opportunity on overhead to simplify the company to drive productivity across the company. It is being masked somewhat in the short term because of the top line pressure. Our guidance implies a pretty significant bounce back in the back half of the year as Mark went through.

[Filippo Falorni, VP of Equity Research at Citi]

Great. Thank you. Very helpful.

[Operator]

Thank you. Your next question comes from the line of Olivia Tong from Raymond James. Ms. Tong, your line is now open.

[Olivia Tong, Managing Director at Raymond James]

Great. Thank you. First I just wanted to ask a follow-up on pricing, and if you could talk about any SKU versus on, you know, categories that we'll see price hikes in, any SKU in terms of more premium or more value to your products. As you think about, I know you mentioned that these are cost justified, but what happens if others don't follow? How comfortable are you with wider price gaps as you try to rebuild the profitability? I have a follow-up. Thank you.

[Chris Peterson, President at Newell Brands]

You know, we can't get into the specifics given the breadth of the pricing. As Mark mentioned in the prepared remarks, it's largely focused in the Home & Commercial segment. It is where the majority of this analysis showed that we haven't fully priced for inflation. In some cases, we because of that, we've got structural profitability challenge. I think, you know, the other thing I would say on the pricing is we'll see as we go on. What we've seen generally to date is where we've priced and pricing has gone into the market, competitors have followed, but they have followed on a lag effect. We've been scraped by competitors.

[Chris Peterson, President at Newell Brands]

In the short term, this may put some market share at risk, if we're trying to go out and take a price increase and competition follows us at some period in the future. Of course, we don't know what they're gonna do. We're gonna watch that. The reason why we feel like this is the right thing to do is even if competition doesn't follow us, because this pricing is geared toward products that are relatively structural, structurally challenged, not all of the pricing, but significant part of it, even if we do have volume loss, it doesn't really cost us that much from a profitability standpoint, if you will. That's why we're convinced it's the right thing to do.

[Chris Peterson, President at Newell Brands]

We'll report out as we go along here.

[Olivia Tong, Managing Director at Raymond James]

Great. Thanks. My follow-up was just I know we're only one quarter into fiscal 2023, but as you think about sort of exit rate, and your second half growth implications, should we expect a similar run rate at the beginning of first half fiscal 2024? I mean, I know the business seasonality is gonna flip, but if destocking will be in the base, the back-to-school timing base is clean, commodities get better, pricing is in place. I would imagine that first half of 2024 should look, the growth rate should look pretty compelling.

[Chris Peterson, President at Newell Brands]

Look, we appreciate the question, we do, but we don't think it's appropriate for us to comment on anything related to fiscal 2024 at this time.

[Operator]

Thank you.

[Olivia Tong, Managing Director at Raymond James]

Got it. Thanks.

[Operator]

Our final question comes from the line of Lauren Lieberman from Barclays. Ms. Lieberman, your line is now open.

[Lauren Lieberman, Managing Director at Barclays]

Thanks. I know you've touched a bunch of times on the price increases, coming at, in the third quarter. My question was actually more about the kind of SKU by SKU analysis and kind of thinking about structural economics across the business. I was curious how much of the gaps that you're kind of seeing or other spots maybe where you're not taking pricing, but that things sort of revealed themselves to you in that work, that suggested there's kind of structural dynamics to be explored, to use your own words, to, you know, free up capacity for reinvesting, for having a stronger and more consistent innovation pipeline. This, this notion of looking at structural economics across the business I found to be really interesting.

[Lauren Lieberman, Managing Director at Barclays]

If there are, you know, things in play that aren't just about straight pricing that help get at that, you know, maybe you know, on a SKU by SKU basis. Thanks.

[Chris Peterson, President at Newell Brands]

Yeah, Lauren, we are, have the same excitement that is in your question, from this work, because I think, one of the things that we've, that we've been building and as we've been simplifying, is a much stronger analytical capability to dissect the business on many different metrics. That capability, coupled with the complexity reduction is what has sort of revealed, this opportunity, which the company really wouldn't have been able to do a few years ago. To the question of, you know, well, are there other opportunities? I think the answer is going to be yes. One of the things that I mentioned in my prepared remarks is that we're going through a refresh of the corporate strategy.

[Chris Peterson, President at Newell Brands]

As part of that refresh, we're going relatively deep on all of the different capabilities that are required to win in this industry and how we stack up versus competition. We're also using this analytics to take a fresh look at the where to play choices and the how to win choices for the company. Then, what we need to do from a sort of culture, talent, standpoint, to enable the execution of that strategy. I think we're pretty excited about that work. We're not through it yet, which is why we're not sharing it here today. I do think we're gonna be in a position to share that in the next few months.

[Chris Peterson, President at Newell Brands]

It's very much based on that sort of, more detailed analytic, look at how the business really breaks out, across a whole variety of different vectors.

[Mark Erceg, CFO at Newell Brands]

The only other thing I'd add is, you know, we looked at almost 6,000 SKUs in the U.S. as part of this work. We are replicating that same analysis for Latin America, for EMEA. You know, we've been building out customer P&Ls, brand P&Ls. You know, we've been doing four-wall plan, you know, cost analyses. I mean, the analytical capabilities are really ramping up, and we think it's gonna provide us with tremendous opportunities in the future.

[Lauren Lieberman, Managing Director at Barclays]

Okay, great. Thanks so much. It's a good place to end the call, I think. Thank you.

[Chris Peterson, President at Newell Brands]

Yes, it is. Thank you. Thanks everybody for joining, and we'll look forward to talking to you again soon.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. A replay of today's call will be available later today on the company's website at ir.newellbrands.com. You may now disconnect. Have a great day.

Participants

Executives

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

Analysts

• Andrea Teixeira, Managing Director and Senior Equity Research Analyst at JPMorgan
• Chris Carey, Equity Analyst at Wells Fargo
• Filippo Falorni, VP of Equity Research at Citi
• Kevin Grundy, Managing Director at Jefferies
• Lauren Lieberman, Managing Director at Barclays
• Olivia Tong, Managing Director at Raymond James
• Peter Grom, Equity Research Analyst at UBS
• Stephen Lengel, Equity Research Associate at Truist Securities