Newell Brands Inc. (NASDAQ:NWL) Q1 2024 Earnings Call Transcript

Newell Brands Inc. (NASDAQ:NWL) Q1 2024 Earnings Call Transcript April 26, 2024

Newell Brands Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Newell Brands’ First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. [Operator Instructions] Today’s conference 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, VP of Investor Relations. Ms. Tsinis, you may begin.

Sofya Tsinis: Thank you. Good morning, everyone. Welcome to Newell Brands first quarter earnings call. On the call with me today are Chris Peterson, our President and CEO; and Mark Erceg, our CFO. Before we begin, I’d like to inform you that during the course of today’s call, we will be making forward-looking statements, which involve risks and uncertainties. Actual results and outcomes may differ materially, and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Form 10-Q and other SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements.

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

Chris Peterson: Thank you, Sofya. Good morning everyone, and welcome to our first quarter call. Newell’s turnaround gained momentum during the first quarter with results ahead of plan across all key metrics. Core sales performance improved sequentially and versus year ago gross margin increased for the third consecutive quarter, normalized operating margin nearly doubled with normalized EBITDA growing over 30% and we meaningfully increased operating cash flow. We made excellent progress on the five major operational and financial priorities that we established for the year. First, during the quarter, we operationalized the new operating model and continue to execute our strategy, which focuses on disproportionately investing in innovation, brand building and go-to-market excellence in our largest and most profitable brands and markets while driving further standardization and scale efficiencies across the supply chain and back-office functions.

We are seeing stronger cross-functional partnerships, which enable more agile and efficient decision making, streamlined ways of working, and a greater sense of ownership and accountability from Newell’s teams, all of which are critical to our transition to a high performing, innovative and inclusive organization. Second, during the quarter, Newell’s top line performance improved sequentially as core sales declined 4.7% versus 9.3% in the fourth quarter with three businesses, Baby, Writing and Commercial, returning to core sales growth. We are seeing green shoots from the decisive actions we are taking to strengthen Newell’s front-end commercial capabilities as we are beginning to bring consumer driven innovation to market. The new business development team is gaining momentum and the international business is outpacing North America.

Let me provide you with a few tangible examples on these three elements. Upgrading Newell’s consumer insights function to unlock actionable insights and proprietary consumer understanding so that we can develop and launch superior new product innovation has been an integral area of focus for us. During the first quarter, we launched our first top tier innovations that came out of our strengthened funnel as we debuted the new Sharpie Creative Markers and Paper Mate InkJoy Gel Bright Pens and what we have deemed a year of creativity for the writing business. Sharpie Creative Markers represents the brand’s entrance into a new category and are expected to be highly accretive to the category. They feature proprietary no-bleed paint-like ink with the control of a marker, which enables writing and creative enthusiasts to make bold statements on a variety of light and dark surfaces, including metal, wood, ceramic, glass, rock, canvas and more.

The new InkJoy Gel Bright Pens feature vivid ink that pops on light and dark paper to inspire endless creative possibilities. To support both launches in March we kicked off the Let’s Get Creative campaign at the hub of creativity and innovation South by Southwest. Sharpie also partnered with Mindy Kaling for a variety of media and influencer events, while Paper Mate launched a new Feel the Joy campaign featuring influencer Happy Kelli to introduce Paper Mate InkJoy Gel Bright. And just last week, Sharpie embarked upon The World Is Your Canvas cross-country Sharpie bus tour, which began at the Main Street Arts Festival in Fort Worth with additional planned stops at festivals, events and retailers throughout the year, culminating at Art Basel in Miami.

We are fully supporting the marketing activation for these exciting consumer driven innovations, which are off to a terrific start. In fact, the Sharpie 12 Count Creative Marker set is already amongst the top SKUs for permanent and paint markers at several key retailers, and the six count pack of Paper Mate InkJoy Gel Bright is currently the number one selling gel pen SKU at the same retail customers. Importantly, this is just the first example of much stronger new product innovation supported with compelling marketing campaigns we plan to launch across our top 25 brands as we operationalize the new strategy and use our pillars of competitive advantage framework to strengthen Newell’s market leading brands. We have eight top-tier innovations planned for this year across multiple businesses and expect the pipeline to continue to build as we look further out.

The new business development team, which we set up last year in the U.S., is driving distribution gains with both new customers and existing customers with new categories. During the first quarter, new distribution was one of the upside drivers to core sales versus the company’s outlook. The new business development team has made significant strides in a remarkably brief period. This team has delivered new distribution gains on Graco, Rubbermaid Brilliance, Calphalon and commercial cleaning in the club channel, which will set in the second half of 2024. We have also seen gains in the dollar channel with significant wins on Rubbermaid and NUK Baby Care, to name a few. With the exit of Bye Bye Baby, we have many new specialty retailers we will be expanding our distribution of Graco, and NUK and other existing customers who are looking to elevate the omni shopping experience for the baby category.

Kohl’s recently announced their Babies R Us store in-store concept and our brands will be prominently featured. We expect new distribution gains to be a meaningful contributor to top line growth going forward. International markets were a growth engine in the first quarter as we moved to the one Newell commercial organization across most regions. Pricing in international markets to offset inflation and currency movements was a meaningful contributor to the core sales performance. Similar to the situation in the United States, we have substantial potential across key markets to enhance distribution further, an opportunity that the regional teams are prioritizing. The third priority we identified for 2024 was driving strong gross margin and operating margin improvement, building on the progress from the second half of 2023.

Newell’s first quarter results were ahead of our expectations on both metrics as normalized gross margin and operating margin expanded 410 basis points and 220 basis points versus last year, respectively, even as we increased advertising and promotion spend as a percent of sales, about 100 basis points year-over-year. This excellent result was a direct reflection of the strategic choices we made to accelerate productivity, focused on more profitable parts of the portfolio, exit structurally unattractive SKUs and categories, and direct our innovation efforts to focus more on MPP and HPP segments. We also made progress on the fourth priority for 2024 as we drove strong growth in operating cash flow, with the cash conversion cycle improving about 30 days year-over-year, enabling us to slightly reduce the company’s leverage ratio relative to 2023 year end and what is historically a cash use quarter.

And lastly, we continue to improve operational excellence by reducing organization complexity through business process redesign with a focus on simplification and accountability as well as technology standardization and enablement across the organization. For example, we successfully completed the Sistema SAP integration in the first quarter. We are encouraged by our first quarter results being ahead of plan on all key metrics. That being said, the first quarter is our seasonally smallest quarter and the external environment remains challenging as we expected. The categories we compete in remain under pressure, with consumers continuing to carefully manage their discretionary spend as the cumulative impact of inflation on food, energy and housing cost has outpaced wage growth.

As such, we are maintaining our outlook for the full year with a continued focus on the five key priorities we laid out at the beginning of the year. It has been less than one year since we deployed our new strategy. We are excited and energized by the progress we are delivering on the turnaround agenda, we remain confident in our ability to strengthen the company’s performance and create value for our stakeholders over time as we continue to move with speed and agility to operationalize our strategy. I would like to thank our dedicated employees for their continued commitment to operating with excellence and delighting our consumers around the world. I will now hand the call over to Mark.

Mark Erceg: Thanks, Chris. And good morning everyone. While we are still writing the first several chapters in Newell’s turnaround story, we are pleased to report that core sales, normalized operating margin and normalized earnings per share were all better than the guidance we provided on our fourth quarter call. We believe this is further evidence that the interventions being made to operationalize Newell’s new corporate strategy and improve the structural economics of the business are beginning to take hold. Core sales at -4.7% represented a nearly 50% improvement on a run rate basis when compared to a 9% decline in the back half of 2023, and was the best core sales performance posted since the second quarter of 2022.

As expected, pricing in international markets, particularly Latin America, which was largely in response to currency movements and inflation, was a meaningful contributor to core sales performance. Investments in Newell’s front-end commercial capabilities, particularly innovation and the new business development, as well as the more streamlined organizational structure following our organizational realignment, also positively contributed to the company’s top and bottom line results. A 3% headwind from currency, largely driven by hyperinflationary conditions in Argentina, accounts for most of the difference between core and net sales which contracted 8% year-over-year to $1.7 billion. We offset the bulk of this currency headwind with pricing in the market.

Perhaps even more encouraging than the sequential improvement in Newell’s core sales trend was the 410 and 220 basis point expansion in normalized gross margin and normalized operating margin versus year ago to 31.2% and 4.6%, respectively. This was the third consecutive quarter of normalized gross margin improvement and the second straight quarter of normalized operating margin expansion year-over-year. Savings from best-in-class productivity, Project Phoenix and organizational realignment along with favorable mix and pricing were the largest drivers of normalized operating margin expansion in Q1, which more than offset the impact of lower net sales, inflation and higher advertising and promotion investment levels. While we’re on the topic of advertising and promotion, it bears repeating that we remain committed to putting more A&P dollars to work behind compelling consumer-led product innovations such as Sharpie Creative Markers and Paper Mate Inkjoy Gel Bright!, which is why our A&P spend was up versus last year in both absolute dollars and as a percentage of sales.

In addition, and in a similar vein, the fact that overhead spending increased versus last year as a percentage of sales despite being down in absolute dollar terms due to over $50 million of Project Phoenix and organizational realignment savings is not lost on us. The increase in overhead spending as a percentage of sales versus a year ago was largely due to top line deleveraging, annual wage inflation and discrete investments being made to enhance several critical front-end commercial and consumer-facing capabilities required to support our new strategy. Importantly, we believe these organizational investments are starting to come to fruition as evidenced by the green shoots Chris mentioned earlier. As such, we remain fully committed to them and while we do expect overhead as a percentage of sales to remain elevated in the near-term, we believe it will start turning down as our revamped product innovation funnel continues to improve and comes to market.

Net interest expense rose $2 million versus last year to $70 million, primarily due to higher interest rates, all of which netted out to flat normalized earnings per share for the quarter despite a much higher-than-expected quarterly tax rate. From a cash flow standpoint, Newell generated $32 million of positive operating cash flow in the first quarter of 2024 compared to a use of $77 million in the first quarter of 2023. Working capital reduction, together with operating income growth resulted in positive operating cash flow, which due to the seasonality of our business has been very hard historically to achieve during the first quarter. Notably, this is the first time Newell has generated positive first quarter operating cash flow since 2020 and only the second time first quarter operating cash flow was positive since the Jarden acquisition in 2016.

Newell’s strong cash performance also helping the company’s leverage ratio down to 5.4x at the end of Q1, which was better than we had originally anticipated. Moving on to our second quarter outlook, we have assumed the following. Core sales are expected to decline 4% to 6%, with net sales down 7% to 9%. As with the first quarter, most of the difference between core net sales is expected to be driven by foreign exchange. We expect normalized operating margin of 9.1% to 9.6%, which is flat to up 50 basis points versus last year. The second quarter normalized operating margin performance is expected to be driven by a meaningful improvement in gross margin, partly offset by an increase in SG&A spending in both absolute dollar terms and as a percentage of sales, primarily driven by a step-up in A&P as we continue to invest behind new consumer-led innovations.

We expect a slight uptick in interest expense, a normalized tax rate around 20% and normalized earnings per share in the range of $0.18 to $0.21. With a stronger-than-anticipated start to the year and with full knowledge that Q1 is traditionally our smallest quarter, we remain confident in our full year outlook. Consistent with that, we are affirming 2024 guidance, which assumes the following. A core sales decline of 3% to 6% with a net sales decline of 5% to 8%. Normalized operating margin of 7.8% to 8.2%, which at the midpoint represents a 100 basis point improvement. If achieved, this would double the 50 basis point annual expansion called for in our evergreen financial model. A normalized earnings per share guidance range of $0.52 to $0.62, which includes a mid-teens normalized tax rate and a $15 million to $20 million step-up in interest expense.

Now you may recall from our last discussion that this EPS guidance range at its midpoint represents high single-digit growth versus last year once a $0.26 year-over-year tax differential is accounted for. For the full year, we continue to forecast operating cash flow of $400 million to $500 million including about $150 million to $200 million in cash restructuring and related charges. From a leverage standpoint, we continue to expect Newell’s leverage to drop to about 5x by the end of Q4. And longer term, we remain committed to achieving investment-grade status and continue to target a leverage ratio of about 2.5x. In closing, it is worth noting that in the last three full quarters since our leadership transition and the development and adoption of our new corporate strategy, Newell return to normalized gross margin expansion with year-over-year increases of 170 basis points in Q3, 570 basis points in Q4 and now 410 basis points in Q1 of 2024.

Over that same three-quarter period, we have also generated $685 million of operating cash flow, paid down about $360 million of debt and lowered our leverage ratio from 6.3x to 5.4x. Therefore, while we are the first to acknowledge that much more work remains as part of our business and organizational transformation to a world-class consumer products company. We are encouraged by the significant progress Newell’s highly professional and dedicated employees have delivered in such a short period of time and remain supremely confident in our ability to fully operationalize and monetize Newell’s new corporate strategy in the years ahead. Operator, if you could, please open the call for questions.

See also 10 Stocks Hedge Funds Are Talking Abouta and 12 Best Growth Stocks to Buy and Hold in 2024.

Q&A SessionSee

Operator: Thank you. [Operator Instructions] Our first question comes from Lauren Lieberman with Barclays. You may proceed.

Lauren Lieberman: Great. Thanks. Good morning. Wanted to ask about Outdoor and Rec, I feel like we’re always asking about this division, but it – just it seems to get worse and worse. And I know that this business probably started from the lowest point had the most work to do, but I was curious if you could maybe give us a bit of an update on portfolio work. How much of that is kind of driving the drawdown that we’re seeing in the core sales and when we can start to think about the business stabilizing and being from a point at which it can grow. Thanks.

Chris Peterson: Yes. Thanks, Lauren. Yes. As we’ve said in prior quarters, each of our business units was starting from a different starting point. And as we did the capability assessment and put the new strategy in place, we have created a consistent endpoint that we’re trying to achieve relative to the front end commercial capabilities. The largest gap from the starting point to that endpoint was and continues to be in the Outdoor and Recreation business. To that end, we’ve made a number of choices in the Outdoor and Recreation business to improve that business over time. So as an example, on the Coleman business, we have pivoted our focus from exclusively focusing on camping to now focusing on outdoor activities, which is a significantly bigger addressable market than narrowly focusing on camping.

On the beverage business, we have pivoted our focus from focusing primarily on thermal to focusing on hydration, which again is a significantly bigger part of the market. We have also turned over the entire leadership team of the Outdoor and Recreation business, starting with a new Segment CEO, who we hired Nico a few months ago, including the entire marketing department, the sales department, the R&D team, and the finance leader. And we now have what I believe is a terrific team on the field. We were starting from an innovation pipeline that really was vacant of anything meaningful. We now have an innovation pipeline that we’re pretty excited about that we’re working on. Most of that innovation is slated to come to market in 2025. So we do have a little bit of time until it will show up in the market.

We have begun to show some of that innovation to top retailers and are getting very strong feedback from the direction that we’re taking. So although, the Outdoor and Rec business currently is the laggard in the portfolio, we are very optimistic about the future of this business because the trends from a consumer standpoint, to spend more time outdoors are certainly over time in our favor. And we believe that we’re on the right course to get this business corrected over time.

Lauren Lieberman: Great. That’s super helpful. And if I can sneak in one more.

Chris Peterson: Sure.

Lauren Lieberman: So – thank you. So just looking back and I know we’re now, it feels like things are inflecting. And like Mark, you pointed out the gross margin progression the last couple quarters, but in 2022, you took down guidance a few times. Same thing happened last year. Usually comes kind of mid-year. Just sitting here right now, I’m curious what you’d say is different about your degree of visibility or planning, so that you feel more confident, presumably in the outlook today than kind of what’s happened in the last two years.

Chris Peterson: Yes. I think the biggest difference is that we unveiled a new strategy in June of last year that was fundamentally different than what the company was doing previously across a whole variety of levels. And if you look at the results that we’re delivering this quarter and that we’ve delivered since we unveiled that strategy, we’ve seen a significant positive inflection in the areas of gross margin, operating margin and cash flow, and we’re starting to see improvement in the rate of core sales. Each quarter, the rate of core sales has gotten better over the last three or four quarters since we put the strategy in place. There is still more work to do. We’re very encouraged by the start that we’re off to in the first quarter.

It came in above, as we mentioned above our expectations on really all of the key metrics, but we’re being prudent in our outlook, because the first quarter is our seasonally smallest quarter. I think the external environment that we’re facing, as I mentioned in the prepared remarks is about what we expected when we gave guidance for the year. So we expected the market this year in our categories to be down low-single digits. And I think our outlook on that has not changed as we sit here today versus what we thought three months ago.

Mark Erceg: And the one thing I would add is just from a planning standpoint, we put a lot of additional processes in place. So we now have very detailed sales walk bridges on every single business that we review regularly that goes out over the course of the entire year. We’ve centralized more of our customer teams and have a very rigorous catch ball process back and forth between those customer teams and the business teams. We’ve been using more system structures like Anaplan and other things to help us as it relates to that. And then the work that we’ve been doing to put brand P&L in place and put brand managers in place who are accountable for their brand’s results are also driving a lot more accountability through the entire forecast process.

Lauren Lieberman: Great. Okay. Thank you so much. I appreciate it.

Operator: Thank you. Our next question comes from Bill Chappell of Truist Securities. You may proceed.

Bill Chappell: Thanks. Good morning.

Chris Peterson: Good morning, Bill.

Bill Chappell: Hey, just first question on – good morning. On the three businesses that have returned to growth. Can you give some more color? I mean, in terms of do you think that’s here to stay as we go through this year or was that more of a kind of a timing of comps? How are the categories faring? Are they growing as well? Or is it more of just kind of shelf space distribution gains? Just any more color kind of on the three businesses that are at least [indiscernible]