Q4 2019 Earnings Call
[music].
Good morning, and welcome to do all brands fourth quarter 2019 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 scheduled for the call. Please limit yourself to.
One question during the Q when a session.
As a reminder, today's conference is being recorded.
Life webcast stuff. This call is available and I are dot Newell brands Dotcom I will now I'll turn the call lever to Nancy O'donnell Senior Vice President of Investor Relations Mr. Donald you may begin.
Thank you [noise].
Good morning, everyone and welcome to Newell Brands' fourth quarter earnings call.
On the call with me today, so, while our president and CEO, Chris Peterson, our CFO and President business operation.
Well, we began I'd like to inform you that during the course of today's call will be making forward looking statements, which involve risks uncertainties actual results and outcome may differ materially.
I refer you to the cautionary language and faster.
Absolutely and our form 10-K into Q4 further discussion of factors affecting these forward looking statement.
Please also recognize it today's remarks waterpark certain non-GAAP financial measures, including goes we refer to normalize measures.
We believe these non-GAAP measures are useful for investors, although they should not be considered superior to the measures presented in accordance with gap.
Explanations of these non-GAAP measures and reconciliation between GAAP and non-GAAP measures can be found in today's earnings release, a table as well or no indefinitely.
[laughter] your attention I'll turn the call over to lobby.
And your Nancy.
Good morning, everyone welcome to the call.
I used to be with you today to discuss.
Our results.
Hi, My observations on the encouraging progress the company has made in 2019.
I recently completed my first small holidays, but no rush.
This time the challenges they face in October.
The strength Oh gosh.
I just discussed the progress we made in 2019.
No sense priorities in 2020, and then turn the call Chris discussed or about 20000.
No.
[laughter] dopamine team was an important yeah off inflection point.
We made significant strides against a five less of the turnaround trial.
Switching to turning the company to sustainable and profitable core sales growth.
Expanding operating margins through their doctor with you and overhead savings.
Accelerating cash conversion cycle through working capital transformation.
Strengthening the portfolio of brands and businesses tend to be treat compete.
Send out a reading tea.
Oh stock for the loss of winning team.
I firmly believe that the most important foundation trust successful in China and fought naming a company to retire <unk> potential is to build that right leadership.
New York has dedicated and passionate employees for want of it.
It's the right leadership in place, we can maximize their potential and drive better outcomes data do you have direction, removing barriers focusing the right people on the right thing.
We're also optimizing our organizational structure, we believe that given the device nature of Boston categories. It's important to have dedicated from facing go to market business units with the requisite domain expertise.
I did my visits units Ceos for strong.
Sustainable profitable revenue growth, [laughter], but leveraging consumer insights and customer relationships drive meaningful innovation.
The same time, we expect them to be some collaborators to support the enterprise entertaining Bakken synergies and efficiencies by leveraging new world scale.
We do not being over these centralized organization.
No we won't be Commonwealth of independent States.
We will differentiate our friends through business units structure, and synergize true enterprise efficiencies.
Hi, I'm, we're announcing two new senior leaders today.
Mike Mcdermott, who joined US recently to lead our commercial business. This business units here, including Rubbermaid commercial box and my Splunk text, Mike has had a stellar Korea. Most recently at bass pro shops by he was president Omni channel retail like before that as executive Vice President and Chief customer Officer.
At Lowe's. He was also ahead of south with GE appliances.
Product innovation, My kids and inspirational leader with great people, it's going to an impressive categories expertise. He has spent the last few weeks meeting with this new team and he matching himself in that business not thrilled to have them onboard.
We also announced the imminent arrival of Chris.
ASCII will be joining your boss next week as business unit CEO.
Uhhuh business, which includes the rubbermaid food Sistema all John.
I would say what brass.
Joins us with extensive experience in the food in housewares category, having served as CEO with America's FOC International a French glassware.
For that in future, especially as president <unk> business, and Chief commercial officer with responsibility of that global House fast business.
[noise] coating brands, such as Pyrex, Corning <unk> and Corral.
Chris Kinda or D. that Brian Gamble, Brashear and illustrious career 14, yes, she's a strong piano leader, that's relevant experience and a terrific track record of driving innovation.
Next I'd have to have our join us.
Recent momentum in this important business.
When the late stages of and such but as CEO for outdoor but our outdoor business and naming a chief customer officer.
Also brought on strong lead us in several key positions at the business unit level I mean the functions.
Since joining new all about it.
Chris has totally rebound finance function I mean brought in new Chief Accounting Officer, and you had a tax accounting and you kind of supply chain Finance and then you had a problem business services in 2019.
You can see that with all these changes.
Into really is hey, you know.
The first fit Aeroflot turn around and turning the company to sustainable profitable course house drove remains a top priority. Our 2019 cost house trajectory showed steady improvement this yeah, but for apart eight business units delivering positive growth in 2019.
Yes businesses are connected home and security writing home fragrance and baby. We're also excited the food business grew high single digits in Q4, revising two quarters of declines and were optimistic about its prospects in 2020.
She does to these teams for their hard work.
We generated double digit growth in E commerce, and we deliver but [noise].
And returned to growth in international markets back also grew low single digits, but let's just say no single digit decline in 2018.
We began to rebound the company innovation process with insights from the newly developed multi product roadmaps, helping to reap off and they've done strengthening the innovation pipeline.
This process takes time.
Yes can be much work to be down, particularly not more challenged businesses, including outdoor recreation and a fine system.
We also overhaul our marketing approach to introduce omni channel focus and it digital first mindset across the organization when the girl, ensuring a seamless interaction between nonprime some consumers across all channels, where they shop.
Although still nascent they're starting to build out our social and digital marketing capability and we are beginning to leverage machine learning and AI tools and thoughts as organization.
Moving on to the second strategic priority of expanding operating margins for productivity and overhead cost savings.
During 2019.
We expanded our normalized operating margin by 50 basis points.
Davinci and disciplined pricing actions to overcome inflation and tariffs.
We also made good progress on complexity reduction initiatives, including reducing SK use like 27%.
One of them anything for safety conversions.
All right 18, seven distribution centers and two manufacturing Pos but more to come on that front in 2000 and training.
In relation to that and that strengthening the portfolio.
The end of 2019, we completed the sale of U.S. blankets, which brought the companies do you two yeah divestiture program to a close.
I'd like to time right town, Joanna Gajuk Council, and Jason Mollin SVP of mergers and acquisitions that teams for their exemplary work on this initiative.
During 2019, we also made the decisive choice to retain the rubbermaid commercial products My bus Bondex quickie businesses, which we expect to be additive to the value creation for me, though.
<unk> ongoing portfolio.
Let's talk a lot of turnaround plan Santos Saddam improving the company's cash conversion cycle through more efficient working capital management.
Team on the Christmas leadership did a tremendous job on that front in 2019.
Reducing our cash conversion cycle by more than 10 days on like for like basis.
Operating cash flow improved 50 fold sustained during 2019 to more than $1 billion, let me repeat that more than $1 billion with free cash flow productivity, Oh, a 100% a significant achievement for the organization.
And importantly, this enabled us to continue to pay down debt, achieving a four point no leverage ratio because the yeah, and making progress in de risking our balance sheet.
In 2019, we pivoted from transformations are time and made good progress on many fronts contactor business units heads functional heads that teams and all doesn't employees resilience and notable results.
Thank you 20, Soc Sue foundational yeah for the town or.
But has a right management team in place a more stable organization collaborative direction and yes set of priorities.
Our two critical girls.
First continued to accelerate cash generation and reduce debt.
To stop revenue declines and laid the foundation to restore long term profitable growth.
We will achieve these goals by focusing on five critical priorities first put in place it consumer customer focus collaborative leadership team domain expertise to galvanized the organization and create a culture winning in the marketplace.
Second 70 focus on cash flow through working capital improvements and debt reduction to achieve on long term target.
Times net debt to continuing operations normalized EBITDA.
That stopped revenue declines by scaling existing and new innovations closing distribution gaps.
Optimizing marketing mix that we're charging online channels and reenergizing tail categories.
All improved operating margins by reducing complexity and shooting SK reduction addressing you know standardizing I teach systems and controlling overheads.
Yes.
She is a major new productivity program.
Sure the gross margin opportunity, we've laid out which were calling project fuel.
Fueled stands for finding untapped efficiencies and leverage.
Major initiative.
Focus on product value engineering automation, improving operational efficiency et cetera across all business units and the enterprise.
The new leadership team at Newell committed to achieving these goals and being laser focus on executing against the five.
However, in all kinda getting to revenue growth will take some time and wouldn't be challenging because for <unk> businesses. After then decline.
I'm confident about the new business units Ceos in place and recent momentum food and commercial we'll get back on track.
Our two big challenges, our appliances and outdoor outgo.
Wrapping up the innovation pipeline means getting customer confidence or not happen overnight.
Hence twentytwenty, we'd be more <unk> foundation on yeah. So these businesses and they'll still be down what drive for the enterprise.
Hi, I'm more optimistic about our ability to improve operating margins in the near term due to a head start in 2019.
Who is the astec about cash flow, becoming a cool all mako.
And to heighten not chances of success on both cash flow in Arkansas.
He now about my secret weapon.
I'm excited to announce a significant expansion responsibility for Christ Peterson.
<unk> Ponting biking him.
President business operations. In addition to his current role as Chief Financial Officer.
This has done a great job in 2019 laying out a turnaround framework and galvanizing the organization to reduce complexity.
So fondly to fight to him as our cash flow Guru.
He and I are doing very well in the turn around the company both Castro jockeys.
Given the critical importance of project fuel and improving operating margins I heard your question, Chris to take on oversight about supply chain and procurement, Dennis and I Chief supply chain office, and Steve Nicola plus our Chief procurement officer beds are bought decrease in addition, he'll be risk.
Possible for Investor relations as well as highlighted in his role as president business operations, Christopher while eliminating all aspects.
No and position the company as an efficient enterprise by taking advantage of our almost $10 billion in scale.
[noise] I have absolute conviction.
But then you knew all wheel drive shareholder value.
Fixated on returning this company to watch fulfills how promises store employees, our customers are consumers and our shareholders.
I look forward to keeping you updated on our progress I'll now turn it over to address.
Thanks, Robin and good morning, everyone.
I'm really excited about the new roll them continuing to work with all of our employees to drive our turnaround plan, including the simplification and cost agenda.
The fourth quarter cap off a strong your progress on the turnaround plan. What results ahead of plan across all key metrics, but the sites up and strategic choices, we've talked over the past 12 months to turn all brands round and drive shareholder value are clearly working and we are focused on building on this momentum.
Before discussing the Q4 results and outlook I want to recap the company's full year 2019 results for 2019 core sales growth increased by 330 basis points from a 5.2% decline in 2018 to a 1.9% decline in 2019.
Gross productivity improvement and overhead reductions more than offset higher advertising spending inflation foreign exchange and tariffs driving a 50 basis points year over year expansion and normalized operating margin.
Operating cash flow improved more than 50% to over $1 billion with free cash flow more than doubling versus year ago.
Great and $79 million.
We made significant progress on complexity reduction as we took out more than 27% of our skews or approximately 20000 skews during the year.
We implemented for successful Sep conversions, we significant <unk>, what do you simply by the IP infrastructure by rationalizing more than 2700 applications and integrating 24 helped us into a single platform, we shut down more than 60 unprofitable direct to consumer websites, we eliminated 40.
Next consumer service locations, we consolidated the Companys real estate footprint by closing or reducing space and 21 office sites. We relocated the corporate headquarters back to allow we streamline the supply chain by closing seven distribution centers into manufacturing plants, and we completed the divest.
Sure program.
Now lets them onto Q4 results.
Net sales decreased 3.1% versus last year to $2.6 billion due to unfavorable foreign exchange and a 1.5% decline in core sales core sales growth was better than expected driven by stronger than expected growth in food and right four business units, writing baby home fragrance.
Delivered positive core sales growth with ecommerce continuing its double digit growth trajectory.
Normalized operating margin remained flat year over year at 11.3%, which was in line with the company's expectations, what the outcome driven by disciplined spending controls productivity initiatives and pricing actions normalized gross margin contracted 70 basis points year over year to 33.5% as productivity and pricing.
Were offset by unfavorable impact from foreign exchange tariffs and inflation.
Overhead cost reductions offset the gross margin prefer yeah, you're bore.
Non interest expense came down by more than $33 million year over year, reflecting the company's deleveraging progress.
The normalized tax rate was 23.2% about inline with expectations.
Normalized net income from discontinued operations was $8 million as compared to nearly $164 million a year ago with the year over year decline driven by the absence of pure fishing jostens process solutions and Rex they are.
Normalized diluted earnings per share from continuing operations improved 33% year over year to 40 cents.
Total company normalized diluted earnings per share came in at 42 cents in exceeded our outlook due to better core sales results.
Now, let's move to the segment performance.
Core sales for the learning and development segment increased 0.9% for reflecting core sales growth in both baby right.
Then baby the forever franchise, and Tom or car seats, along with new innovation in the swings category continues to drive Pos growth for graco.
Growth in the core writing business more than offset had one from weakness and Masland category.
Core sales for the food and commercial segment also increased 0.9% food business grew nicely in Q4, reflecting the benefit from the previously disclose show and sell on for Brian Black Friday orders as well as strengthen the fresh preserving franchise the commercial division, while still under pressure improved to six.
Potentially relative to Q3, that's the team is making progress on rebuilding the momentum.
Nope, that's starting in Q4, the commercial business now includes the rubbermaid commercial products might respond tax and quickie businesses.
[noise] Q4 core sales for the home and outdoor living segment declined 2.8% home fragrance business Bill on the momentum from prior quarter during the important holiday period, reflecting strength in E commerce.
EMEA and the wholesale channel the team opened a new state of the our research and development facility in South Deerfield, Massachusetts, Massachusetts, which enhances capabilities and capacity to develop prototype and test new innovations across the entire range of products within the home fragrance portfolio.
As anticipated the connected home and security business declined as a result of selling timing for the fire safety month promotions, which helped Q3.
Core sales for the outdoor and recreation business remained in the negative territory.
Lastly, core sales for the appliance and cookware segment remained soft declining 4.6%.
Similar to what we've experienced in recent quarters softness the more North America more than offset strong results in Latin America.
Let's switch gears to cash flow, which came in ahead of our expectations due to diligent efforts across the organization to reduce the companies working capital needs operating cash flow improved more than 24% year over year to $620 million during the seasonally most significant quarter of the year just wasn't.
Hey, remarkable achievement, particularly considering the loss contribution from businesses that have been sold.
During the fourth quarter, we use the proceeds from the U.S., playing cards transaction as well as operating cash flow to reduce the company's debt by over $600 million what plans in place to continue to strengthen the balance sheet in 2020.
We exited 2019 with a net debt to continuing operations normalized EBITDA leverage ratio up 4.0 times, a meaningful improvement versus last year.
Turning to 2020, I want to start by providing some context for our plan.
In 2020, we are planning another year of sequential progress on topline growth.
And improvement in operating margin driven by growth productivity improvements and overhead reduction, which more than offset the impact of higher advertising and promotion spending commodity and wage inflation tariffs and foreign exchange.
And we expect to deliver another strong year or cash flow as we continue to drive improvement in our cash conversion cycle.
The unfortunate outbreak of the Corona virus has taken over recent headlines and we're closely monitoring the situation. The first and foremost ensure the safety of our employees as well as planned for business continuity.
Based on what we know today, we are pleased that there are no suspected or confirmed Corona virus cases for any direct normal style.
Well, we do not have any significant third party suppliers in the Williston area. Our suppliers are experiencing some disruption from slower start up in the factories after the Chinese new year break and more restricted travel in the country.
Our current outlook for the first quarter assumes about a 1% headwind on top line from these issues, mostly impacting the applying some cookware and outdoor recreation businesses.
Our guidance assumes the impact is temporary and contained to the first quarter.
Our cross functional team will continue to stay close to the situation [laughter] implement mitigating actions as necessary.
Specifically our initial outlook for 2020 is the following net sales of $9.4 billion to $9.55 billion with core sales flat to down 2% or more than 100 basis point headwind from foreign currency closure of underperforming Yankee candle retail stores.
As well as the exit biannual from the North America distribution of Universal riding products.
Normalized operating margin improvement of 10 to 40 basis points to 10.9% to 11.2%, that's carryover pricing meaningful productivity, great games and tight overhead spending on increases in a NPV and capability investments and offset approximately $165 million and then.
Place scenario tear.
Currency related pressure.
Normalized effective tax rate is expected to be into mid teens right.
We expect to live normalized diluted earnings per share in a range of $1.46 to $1.50 sex with the diluted share count around 426 million.
We expect 2020 to be another strong cash flow year, and our forecasting cash flow from operations and the 1.0 to 1.15 billion dollar range with free cash flow productivity in excess of 100% for the second consecutive year.
In fact based on Google strong cash flow generation capability, the free cash flow yield based on the current stock price is over 9% [noise].
Looking at Q1, specifically, we currently expect net sales in the 1.9 to 1.95 billion dollar range as core sales are forecast to be down 3% to 5% largely reflecting timing impacts of order shipments in food related I say p. implementation in the prior year and home fragrance pipeline.
Bell related to Woodway wholesale expansion of the prior year as well as the potential incremental headwind from the Corona virus.
We currently anticipate normalized operating margin declined 50 to 90 basis points to 5.2% to 5.6% due to an increase in advertising spending versus the prior year.
Given the seasonality of the business Q1 is the smallest quarter over the year for Newell brands, which means that comparisons can be easily skewed.
The normalized effective tax rate is estimated in the low single digits.
Normalized diluted earnings per share for the company or projected within a five to eight cents range with the diluted share count around 425 million.
In closing, we're very excited about the progress we have made on the turnaround strategy in 2019, and we expect to deliver another year of sequential progress in 2020.
The leadership team that we are building gives us confidence that we will continue to improve the operating performance of the company [laughter] build shareholder value.
Operator, well now begin Mcewen <unk> session.
[laughter]. Thank him if he would like asking a question. Please signaled by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure your mute function. It's turned off to allow your signaled to recharge with it.
Again press Star one to ask a question.
Your first question comes from Lauren Lieberman with Barclays capital.
Morning.
I was hoping you could talk a little bit about how you are thinking about the innovation processing in filling up that pipeline and there's things you could talk about in terms of sourcing ideas.
Things, you're doing to better understand the consumer landscape I think there's been the last five years, probably an enormous and none of activity in some of your categories from smaller kind of more upstart brands, where you might then it's not I wouldn't Miss I thought that was going to happen in the categories and mcnall competes.
And can be said, but the lens through which are looking to.
Upgrade and evolving innovation process would be great. Thanks.
Thank you so much the arm for the question.
First of all your.
You hit on something really critical because the Super majority are far businesses. In fact, probably all of them are very responsible for innovation and yes in some categories. We've taken our eye off the ball and let.
Some people come up and come up at the innovation.
Now the whole point about this I think the first point is the gotta create a consumer first mindset to accommodate Radnet D N a fundamentally shifts to say.
You got on the stand the consumer journey from beginning to understand and it also is about being long trend understanding what are the trends anticipating them.
And really being on top.
BARDA style, it's about a color since about design, it's about long, but also about you go inside Sprague's say, hey can you do meaningful innovation. The second part of it as we how even so take appliance and cookware with 36 categories.
There are lot categories, which are small and were ignored for almost a decade, and that's where someone will come up and say, let's let's do something so it's important to renovate even your smaller categories. They don't have to be magical but you've got to bring news because news is pretty important and then the dark BARDA is.
Once you get that having scale. These innovations in the marketplace through really focusing bomb the rights marketing mix, and saying, which ones do you really go after so many think about it today. This year, we've got the out of the pool.
I think that teams done a really in job because they've got in front of but they realized that the pen categories. A large category, we have a terrific Brandon sharpie.
That's amazing consumer equity my first on intense so and problem that they really drove innovation.
It was a cross functional collaboration they also did but speed. So I really believe it can be dom and hence, bringing in really consumer driven people who have boat.
Goods.
Experience durables experience, while I understand the gamut of consumer.
People like my people like Chris coming in and I think we got to populate the businesses for the people who really have done the innovation all that lives. So I'm quite confident it's just a matter of rent lobbyists.
Great. Thanks.
On the only other point I would add is that we did over the past 12 months put in innovation review process in place, which we've now gone through with each of the division [laughter] I'm not surprisingly you can see the divisions that we've returned to core sales growth are the divisions that half the strongest innovation pipeline.
And I think if you look broadly at the company today, our innovation pipeline as we sit here today for the next couple of years, it's stronger today than where we were 12 months ago [noise].
We're not where we need to be fully yeah. I think we've got four divisions that we've talked about that.
Returned to core sales growth this year and we feel very good about their innovation pipeline I think we've got we're making very good progress on food and commercial as Ravi had mentioned and I think the two places where we have gaps in the innovation pipeline our clients as an outdoor and those are going to take a little longer for us. The full every populate for one thing I'd I'd has.
[laughter] you asked about or are we going I look outside faster me because we were the business units structure had become a little bit of a Commonwealth of independent state.
Operation between our R&D groups as often as high so were going to be creating centers of excellence. So for instance are connected home is really good on the internet of things and yet we also need that or something like Dynamo and right. How do we connect these two groups to exchange best practices. Secondly, we are going to stop.
Our crane with bombs outside which are doing a lot of innovation walk and to get to break through ideas and breakthrough innovations because we can just say everything was going to come from inside there's a lot of people were doing things outside and so we're going to look at that when you look at the other thing is strategic shifts.
Brilliant one has been home fragrance bed, they've gone from a capital company to a home fragrance company and that shift has allowed us to come up at Cardiff Fresheners outdoor.
Candles.
So there really [noise].
End of collaboration between marketing and R&D there is about.
[laughter].
Next question. Please our next question comes from Olivia Tong with Bank of America.
Hi, good morning.
Wanted to start Encore sales clearly Q1, you explained a little bit of that step down relative to Q4, but your plan I seem to core sales growth potentially by year end. So can you talk a little bit about the steps to getting there and what's your view is on price versus volume and also how much more SKU rationalization are you anticipating after 20.
Hi, this year.
Yeah. So if you look at the core sales guidance in the plan that we have as I mentioned, we feel more confident in our innovation pipeline heading into this year than we did.
On last year.
Our course out guidance for the year, a flat to down 2%. If you looked at on a two year stack basis is actually a 400 basis point improvement in 2020 versus what the two year stack number would be for 2019, we do get off to a little bit of a slower start in the first quarter, which is our seasonally smallest quarter.
Because of the three timing issues that I mentioned, which is the S&P conversion that we did in the food business April 1st last year that we mentioned on.
The first quarter call last year.
The the pipeline shipment on Woodway as we expanded that into wholesale and be a corona virus impact that I thought I mentioned.
But we're confident in the year.
We can see stronger pipeline of innovation that we've got coming.
For the full year.
Are you are you looking for incremental acceleration in the in the businesses that are growing or for more of a turnaround in the brands have aren't currently growing and then Robby as you look further into this portfolio does your outlook assume any potential for.
Any exits of either product finds brands what have you.
Yeah. So I think look we you always want to leverage our strengths and sadly the businesses that have strength or we're going to continue to drive them and they're going to be too because the for that have already been mentioned, but we're also optimistic about food, which did well in Q4.
As I mentioned I think and now it's Chris coming on Board I think it's really I I'm very bullish.
Well issue about the food business and RCP, the rubbermaid commercial and wrap us bomb Tech.
We're really making the core business of the contractual business is in good shape with good innovation is the consumer business of that business that we need to address and we're already doing a lot of stop there now so it might coming on board I feel pretty good so that means for cross to ER. So the appliances.
Outdoor we really need to do.
Doing somewhat that so I think I've got to rely on on the bus four plus the two.
No I recognize and writing a lot and terrific thing with your the band, but we have some issues. Its line that is continuing to be a little bit of a dry but I'm. So confident of all the great things that the writing business is doing that's going to be a very positive thing for us. So now let me get to a the other issue.
In terms of or how do the Oh, we borrowed okay. This this is not a one year deal does not us sprint, it's a matter of Paul and I'm still confident appliance and corporate business. The good business. It is growing we're just losing chat and we need to just fix it and I still.
I think the outdoor business is a good business. We made progress now on beverage reach actually had some growth and the mom and Brian actually had some growth.
So it's just how the other ones that are.
Ben I'm, a little bit about down Brad. So overall I feel that we are making good progress and.
That's why long a child I really.
The reason I joined us really because I feel great brands, and we can improve them trajectory.
Thanks, Robbie Thanks, Chris.
Thank you.
Our next question comes from a Joe Altobello with Raymond James.
Thanks, Hey, guys. Good morning, So want to go back to the two problem children, I suppose appliances, and outdoor and you guys talked about this morning.
Punishing innovation pipeline or potentially seeing growth and some of this business is down to a down the road here is it purely in innovation issue or are there.
Other issues in the retail channel for example, competitively that better better hampering those businesses as well.
So let me take a shot at it and Chris Kinda hopped on some thoughts so let's take each one of the outdoor recreation.
It really got three businesses that you got Marmaton Ekso Fisher with just a technical apparel business you have got Coleman and then you got a the beverage business, so its contigo and Bubba and so.
One thing we have done now a while the organizational changes I've made is really looking at them as three verticals fraud than most of them all together because that three very different businesses and we have created a business champion against each of those businesses. So that they can really have domain expertise and drive it and we're also getting coastal.
And yet CEO for the entire business I feel pretty good. The Oh, we are now making good strides because it's taken us time, but even on Coleman.
On tense sort of about two new tenants that have been accepted at a major retailer a and we're now beginning to do refreshes, so coolers to tetra and beverages, we are bringing some innovation looking for distribution gaps. So innovations one part of it but then you have innovation it is scaling that way.
And also looking at distribution and making sure that you're getting into that I'd distribution and third who bought to make sure that channel management is very critical they come on with Brian you've got to make sure that Ah you manage the channels properly because if it's an upscale brands you want to make sure that its identity kept intact.
So I think it goes beyond the innovation, but the innovation so starting a.
So it's also go marketing any ourselves and you do have private label competitors for instance, in the 10th business. We've got a major retailer who is a big competitor. So you've got an okay and given some of these are all sourced from the same places how do you compete how do build up routes, so appliance inquired slightly different than we ever.
A lot of categories there.
And we have some companies come in and really a take or marciano sunny innovations from golfing stop but there's also that business going a lot on a lot. So who's got a figure out how do we be how do we become digital bust. So those would be couple of points that I'd like to appoint anything you want to address.
No I think that though I think that's the that's that those are the two problem child and a I think we know what needs to be done the only thing I would add is that the categories themselves. We believe our attractive because the appliance in footwear category is growing.
And it's clearly response of the innovation and so we just have to do a better job.
Oh, providing that innovation that is.
Connected to from consumer insights with products that represent a superior value equation.
And do not in a way that some strong partnership with our with our retail partners. So so I'm optimistic now and I do want to bring in.
Just recently, Chris and I toward Japan.
And we met with our Japanese outdoor team and it's a sizable business in Japan, and it's incredible what they've done it's a premium brands. This I'm talking about the outdoor business Coleman is a wonderful brown and that brand that has been growing for the last decade, and even this year. It group, so and they're very profitable in Japan.
In mind you. So it can be Dom it will be Dom it's just a matter of Ren knocked it.
That's very helpful. Thank you guys.
Our next question comes from Bill Chappell Suntrust Robinson Humphrey.
[noise] Thanks, good morning.
On a go a one one housekeeping, Chris maybe you could talk a little bit about or the tax rate in the first quarter and on full year, and then kind of how that's sustainable or where did that will go eventually and then on the question on home fragrance.
On the core growth this year the expectations are there any further doors to close or is that largely done you know and where do you see distribution gains are coming to can offset that.
[noise] you'd like to past all right I'll start with the tax rate so [noise].
The tax rate guidance that we gave for both the corridor and for the full year is impacted by discrete tax items. So the company has this has a number of discrete tax items that are opportunities that we are aggressively pursuing a you saw that in the results. This year and that is factored in.
Through our guidance for both the first quarter and for the full year next year. If you look at the ultimate going tax rate of the company as we sit here today the tax rate in the U.S. for the company is about in the mid Twentys use in our international tax rates about in the ER and the teams and so on a consolidated basis.
Going tax rate, excluding discrete items would be somewhere around 20%.
Yeah, but in any given your could be less or more than that based on the discrete items. So that's that's the current situation with the tax rate.
On the home fragrance side Bell.
First of all that team's doing a terrific job.
And Brent ended the innovation to deal with them.
And there is a firing on all cylinders and there have been very thoughtful about the retail business. In fact, I had one of my former colleagues.
Who is an expert at retail go take a look at the retail business and I think there have been quite thoughtful about it the retail business does so for us as good brand building and awareness building, but they're all are located in malls and you know what's happening in malls and traffic is coming down and so for US I think it's just to being.
Pragmatic and making sure we look at each store per se is it profitable or not and if it's not our time and the lease comes up for renewal I live in green negotiate the lease or terminated so but the good news is that it's a real shift occurring first we are making tremendous inroads with the mass merchants on this and.
Or the teams done a super job second our own direct to consumer business is doing so that'd be well as well. So it's not like so it's a matter of transferring the volume. So we'll systematically shutdowns process. They are if they're not profitable and if he can get the Oh no reason lease rates so about that'd be a go.
Uh huh, but we do that we're going to keep transferring the bottom to all the channels that we specifically we closed 75 stores in 2019 and I would expect in 2020, it'll be probably a similar number of stores that will double close we don't know exactly the number because what's happening as we.
Go to close stores is in many cases that are the landlord to come back to us and say well if we cut your Iran would you stay and so in some cases, if the reduction in rent that we're able to achieve terms the store profitable we're agreeing to stay for a short period of time typically not.
Green to leases any longer than 12 months out though.
Got it thanks, so much.
Our next question comes from Kevin Grundy with Jefferies.
Thanks, Good morning, everyone.
Oh quick housekeeping question for me as well and then a larger question on margin investment levels with the housekeeping one related to the Corona virus can you just remind us how much of Newell's total business as a percent of sales is currently sourced from China and then the bigger question for both of you is is the longer term opera.
Acuity for margins and adequacy of investment levels. So the guidance is for 10 to 40 basis points of margin improvement. This year, Chris you recall of course, it Cagney you talked about two to 300 basis points of opportunity in gross margin. There was four to 500 basis points and overheads. So 600 basis 600 800 basis points.
Opportunity of which I think loosely they'd be expectation was half of that could potentially flow through their earnings. So yeah. That's all the big wind up for how should investors be thinking about the long term margin opportunity and cadence of that margin improvement for Newell.
Robbie are you comfortable with current investment levels and then as you know, it's not terribly uncommon for new Ceos to take an earnings reset did you give any thought to that you seem pretty bullish on on the portfolio. When the opportunity returned to growth could you potentially accelerated that passed by leaning in here a bit more heavily on a on investment lever.
This is here thanks for all that.
Scott is fine to start it's all start let me handle Corona virus first so the company has about 40% to 50% of its total business that is sourced.
I don't know that we've disclosed specifically how much of that 40% to 50% us from China, but it's a significant.
Part of that that comes from China, not 100%, but a significant portion I would say China is our largest source in country out of that 40% to 50%.
That being said what we're seeing on current a virus just to be clear is our suppliers factories of all started off the issue is that.
The workers in those factories are returning to work a little bit slower than what they typically what up because of travel restrictions and then the movement up goods in the country is a little bit slower because of checkpoints and travel restrictions and so you know as I mentioned in the prepared remarks, we're staying close to it.
Our guidance assumes about a 1% negative impact of course sales in Q1, but Ah we don't.
At the moment contemplate that that this will have a material impacts to the year because of the timing of when its minutes occurring assuming that the situation continues to resolve obviously, we're not predicting what's happening to the situation, but but that's our that's our current view on the margin point, a cagney last year.
Our reported margins in 2018 were 9.1%. This year, we ended a 10.8, so our operating margin.
In 2019 is up 170 basis points from the reported operating margin in 2018, which was the number that I. We're starting from a catch up that hundred 70 basis points 50 basis points was like for like operating margin improvement and 120 basis points was because of the mix impact.
Keeping the rubbermaid commercial products mapping quickie business. So we've already taken a big step forward on operating margins. If you look at the margin guidance for this year about 10 to 40 basis points I think it reflects broadly what we're talking about which is the margin contribution from gross a.
City and from overhead reduction is significantly higher than the 10 to 40 basis points, but we are reinvesting a good portion of those savings back into higher advertising and promotion spend and into capability building investments that we think I will set us up to continue to drive momentum going.
Forward.
Okay. So let me address or Kevin your question [laughter], So fat point on.
Typically news see as one of a reset.
But this is your I went at that time, CEO said Lafayette to improve things a sole focus he has to drive shareholder value and get employees and get it out make new old strong for the future. So I think that's really my ammo and agenda here.
So having said that when I look at our portfolio.
And looking at our challenge ahead.
Very pragmatic that when I turn around this is I think I'm very glad it's not a confirmation that I think Chris recognized that the hadn't citrus easy for me to build on that second.
It's like a big Jumbo jets.
And Oh.
I'd say, it's got a then gets made me tour out.
And Oh, two we got or sort of real pairing back you got quite to the destination, you've gotten does save it'll take a break jaromir. There. So a so you recognize that seven challenges that you bought off that you bought a walk and chew gum at the same time. So is the level of investment and sat matti as a water.
Like it to be no. The most telling one on that as and Pete I just feel for consumer company <unk> and he is pretty low.
We really need to increase it then we were marginally trying to do that but did the meanwhile, with whatever we have we just have to be very smart about how we spend it. So that we are optimizing those dollars for the maximum impact behind the group biggest innovations we have but over time you won't see is asked we stopped getting efficiency.
That we will stop investing more in a and b. So that that'll help us grow but I think it's a pay as you go as opposed to saying, let's do an investment now and Hayden USIO I'll give you a hockey stick later I don't think we can do that we've got to be clear, hence the importance of project fuel.
Which for me as one of the biggest beds I have personally Madison, CEO, and which is why my secret weapon as Chris to oversee it and because that is gonna be went up our biggest things make to flow dollars to operating income, but also help us reading best for the future.
Okay. Thank you both look forward to see you'd Cagney next week.
Thank you.
Our next question comes from Wendy Nicholson with Citi investment research.
My first it's just a follow up sort of clarification, Chris on the gross margin is there a specific gross margin goal for 2020, if you could just circle back on that that'd be great and then my second question sort of bigger picture. It's just in terms of the outlook for core sales growth you know obviously, it's it's it's.
Shifted out out of the first quarter, which is totally fine, but I'm just trying to get a sense for how much of the improvement in core sales growth do you think comes from regaining some lost distribution that you've had over the last couple of years is it that you have specific line of sight Q on you know new products that you know he will be lucky get still.
It's like the innovation process is still on the comments that are 10, or so I'm just trying to get more confident in that core sales growth outlook. Thanks.
Yeah. Thanks, Wendy I'm on the gross margin point, we're not going to guide gross margins specifically, we got operating margin that being said I will say that our plan is for gross margin to move up meaningfully in 2020 versus 2019.
Based on the project fueled.
Initiative that Ravi talked about now that we've kicked off we've put a pretty good <unk> program in place over the last 18 to 24 months at beginning to build capability to go after both procurement savings manufacturing efficiency savings.
Improvements in planning a the skew count reduction as I as I mentioned in the prepared remarks, where we've taken out 28000 skews. This year, our starting point. When you include rubbermaid commercial Mapa and quickie now with 101000 at the beginning of 2019, we're down to about 73000.
And and I think that we've got a plan to get below 50000 over the next you know 12 18 months. So we'll continue that journey and that drives significant efficiency on the core sales side, you know maybe a way to think about it as if we delivered minus 1.9% core sales growth and.
2019, and we're guiding for sequential improvement a flat to minus two if the for businesses that we grew in 2019 continue at the current rate and the food and commercial business improves based on what we've seen already in the fourth quarter and what.
We know the innovation pipeline.
Even if appliance and cookware and outdoor and rack stay about the same rate of decline in 2020 is 29 team that gets you to the sequential rate of improvement that we're talking about.
And let me add something there.
The entire if you think about some of the key.
Tactical.
Actions that were taking.
With the and these are not necessarily in order of priority.
But yes, there is definitely a trust to improve our distribution, but typically in some channels, which were right at Tony not as strong in terms of grocery drug and dollar stores and I mentioned to chief customer officer, and Oh, we're bringing that person. Then we're also going to create a VP level for the.
Enterprise has a whole the be useful settled arrow.
I think for this because we've got a opportunities across different categories different businesses. So I think battle suddenly be.
An area, where we're going to look out online we'll continue to be an important growth area for us and we were double digits in 2019, and that'll continue to be a trust.
International which turned positive, but we're continuing to drive that and then clearly we've got some innovations for printing training that or are in the was that a in each of the businesses Duffy hoped it would give us some traction.
Terrific. That's helpful. Thank you so much.
Our next question comes from Steve powers with Scotiabank.
[noise] morning, guys.
Robbie when we last talk you seemed very focused on two things. In addition to filling some key positions, which seems to be progressing well not number one was eradicating complexity across the business number two was landing on the right operating model for Newell balancing the desire for scale unification against the individual needs of of your different businesses.
You started to address those in your prepared remarks and.
Perhaps we'll split your more next week, but could you give us an update on <unk> on how far developed do you consider your thinking to be on both those two things specifically do you do you I guess specifically what is your your confidence you have line of sight to simply simplification. It's just for 2020, Chris mentioned SKU reduction plans, but beyond that it.
On the organisation front <unk> is it fixed should we be surprised if the model continues to be tweaked and I'm, particularly curious like how functions such as R&D in E commerce and marketing fit in and whether those are all going to be more centralized a more autonomous going forward relative to the past just anything you can bump around that would be great.
Sure I think on the complexity side.
I actually think that Ah, Chris laid out a really good praying Buck in 2019, and we're executing against it.
And it is really asking older adoption is producing obsolete inventory yeah. The whole yeah no side.
It is about forecast accuracy. It is about standardizing systems and it is really about improving our network of plans improving efficiencies lot offense about an automation standardization.
In many ways no or even though it had a centralized structure for a while that's legacy things for each business then its own thing yeah, we have hundreds of applications and even with the standardization of S.A.B. lose their lot homegrown systems that people have become very fond of the gotta get bus because.
Common language, so and that's why putting some money charge was very good I'd like Chris and saying, Hey, George All think of it must achieve complexity reduction officer, but you got or do you need because without that it's been tough to move forward. There's so many even on overheads be country.
Moving on the next step honest because the structural barriers, we do so much value or what's going on a on anoro and be in this just lot of that and that's why this global business services really going after that is pretty important. So I think that complexity I feel pretty good about oh.
On the B you structure in my mind, there's pretty good clarity now so I think but no. The culture was we don't have a dimmer switch where either completely centralized and are we say completely de centralized where the competes he'd be centralized says Commonwealth of independence.
Thanks, and every one to carrying goodbye laughter declaration of independence, or so centralizing bureaucratic no. One can move I think we really have getting to a hybrid model I think it's very important that when you this spread products and categories. The Bu is the center of attention. So they've got to really focus there.
We're creating Ceos for that so the marketing sales R&D will still be house, there [laughter] acting upon just the enterprise for efficiencies, but do you want on R&D, how do you exchange best practices. So the way to do that is not just structure, but true becoming very collaborative and that team some more important than the individual.
Okay very good thank you.
Our next question comes from Andrea Tech she wrong with JP Morgan.
Hi, Thank you. Good morning. So my question is a follow up on your comments about marching so under my on the beach to if we're marching outlook.
EBIT expense about 30 basis points at the midpoint. So should we think about the gross margin improved many 2020 because of these SK you with yeah rationalization, but that will fund more and Pmnine gene Oh I.
Here are those two accounts from your comments before it sounds as if you're not going to go up that much easier yet and then use some of those gross margin dollars into into we'd building the structures and in other words screen anymore capabilities on those areas. So how we should be thinking out all the puts and takes between goes.
<unk> accretion and EBIT and EBIT expansion. Thank you.
Yeah, So I'm I'm expire.
Just on that question I expect the gross margin to grow to improved more than the operating margin and 2020. So our operating margin as tend to tend to 40 basis points of improvement I think the gross margin improvement will be ahead of that and then they'll be reinvestment back primarily and an P.
That mitigates that and you know, we're also driving overhead costs down year over year on a dollar basis. So that's that's effectively in a way to think about the components of it.
[laughter] Okay. Yeah. The question Alan Thank you [laughter] I go ahead.
No did you have a quick follow up what Chris sorry, I didn't mean to control. Yeah have you. Thank you I yeah, Chris I just wanted to follow up that I I think we all trying to figure out the glut of magnitude right. If it's gonna be read it transformation, though.
GMP investment easier or we should be thinking what are they.
Transition here as you highlighted before to make sure that you're not filling dollars that projects I have not fully baked in is that the way we should be thinking Oh, I know I mean, we're having great visibility on that business is that working well and you want to make sure. It does get fully funded.
Look I think that yeah, maybe another way to think about it is as we mentioned our innovation pipeline heading into this year a stronger than our innovation pipeline was heading into last year, but it's not yet fully where we wanted to be because of where we aren't with appliances and outdoor and so with a stronger innovation pipeline our plan calls for us.
The spend more in advertising and promotion behind it which we think is a good investment we're probably not spending at the full amount that we'd like to because we're not going to spend in areas, where we don't have strong innovation because that that we don't think that's a good use of money.
You know as I said, we're not gonna give specific guidance on the components. Our guidance is on operating margin, but conceptually so youre going to see the gross margin being stronger than the operating margin advertising and promotion, we expect to be up as a percent of sales and a and then overhead costs were working.
And then have a plan to reduce overhead dollars.
And Ah you know obviously, we'll report more as we go throughout the year.
Okay. So with that thank you all for joining us today, we're going to be a cat needs. So Chris and I look forward to seeing many if you then XP all buttoned up but thank you so much.
Thank you everyone. A replay of today's call will be available later today on our website at <unk> IR Dot Newell brands Dot Com. This concludes our conference you may now disconnect.
[noise] [noise].
[music] [noise].