Q3 2022 Newell Brands Inc Earnings Call

October 28, 2022

[music].

Okay.

Good morning, ladies and gentlemen, and welcome to Newell Brands' third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.

So 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&A session.

As a reminder, today's conference is being recorded a live webcast of this call is available at IR Dot the old branch Dot com.

I will now turn the call over to Sophie as soon as Vice President of Investor Relations you may begin.

Thank you good morning, everyone welcome to nail brands third quarter earnings call on the call with me today are Rami solar Graham, our CEO and Chris Peterson, our president and CFO before we begin I'd like to inform you that during the course of today's call. We will be making forward looking statements involve risks and uncertainties actual result.

And outcomes may differ materially.

No obligation to update forward looking statements.

We refer you to the cautionary language and risk factors is available in our earnings release, our Form 10-K Form 10-Q, and other SEC filings available on our Investor Relations website for further discussion of the factors affecting forward looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including Bill.

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 as well as in other materials.

I know its investor Relations website, Thank you and now I'll turn the call over to Robyn.

Thank you.

Good morning, everyone and thank you for joining us on our third quarter call.

Following strong performance over the first half of the year the company's results decelerated in the third quarter, reflecting a tough operating environment as many retailers rightsize their inventory positions inflationary pressure on both the consumer and our business.

The impact of a stronger dollar Additionally, Q3 performance.

Unfavourably impacted by customers shifting on us into the first half.

As a result of these factors cost outs turn negative in the quarter declining 10.8% on top of three 2% growth last year.

This had a corresponding.

Deleveraging impact on normalized operating margin, which contracted 120 basis points year over year.

Despite strong progress on productivity and cost containment actions.

Cost has declined yet.

And all business units.

The commercial business as the pullback in customer orders.

<unk> headwind.

International markets outpaced North America, as we did not experience the same level of retailer inventory reductions that <unk>.

Courthouse outside North America declined one 4% as four 8% growth in Latin America was offset by declines in EMEA and Asia Pacific.

Consumer confidence due to record inflation and concerns surrounding the war in Ukraine continue to weigh on the EMEA region with APAC region impacted by Covid related restrictions and lockdowns in certain markets.

Yesterday <unk> core sales declined one 3% on top of a challenging 15, 2% growth comparison.

As normalized operating margin expanded 10 basis points year over year, despite significant inflationary and foreign exchange headwinds.

Many of our key brands continued to show strength yesterday.

Including Rubbermaid commercial products Sharpie paper mate Expo, Adam Meyers ball Robert made in Quantico.

While domestic consumption moderated get over yet.

<unk> 2019 levels, both during the third quarter and year to date.

Going forward, we expect demand patterns to continue to be unfavorably impacted by inflationary pressure on the consumer which is constraining discretionary spending particularly for value driven shoppers.

In some categories such as home fragrance, we have lost low income shoppers, who are only able to enter the category last year due to the boost from the government stimulus. We expect some pandemic related trends that elevated demand to continue to subside.

Due to concerns about the high price of everyday goods and gas a potential recession.

Rising interest rates and declining personal savings rate, we are seeing a more cautious consumer today.

But one that is willing to purchase an offering that provides good value.

We've been optimizing our product assortment to ensure it provides the appropriate value proposition to the consumer.

We have also been activating sharper campaigns with a focus on value messaging.

Better connect with shoppers and adding customers.

The commercial business unit, but a true standout this quarter and yesterday registering courthouse growth north of 9% in both time periods enabled by excellent execution and strong price realization with our innovation and assortment hyper focused on reducing cost in use.

And delivering savings to our end users. It is leading to positive momentum in our b to B, where the codes have professional customers and distributors strengthened the beat to be professional channel was further fueled by improved mobility and return to the office as well as distribution gains, which help offset the impact of <unk>.

Operating traffic at retail in the <unk> channel customers seek performance quality.

And strong durability, all of which are at the core of our rubbermaid commercial product offerings.

As a result of shifting consumer behaviors debit.

The decision the decision by many retailers to aggressively manage the inventory levels and reduce orders weighed on performance on the majority of our consumer facing businesses.

Core sales declined four six business units during the third quarter.

We do not believe this is indicative of underlying operational health issues, but rather that dynamic environment, we're in as well as base period comparison.

Let me illustrate this point for a discussion of our baby and writing business units.

Our baby business was cycling against a challenging double digit core sales growth comparison.

While core sales declined in the quarter it increase relative to 2020 in 2019 levels. Despite the headwind from retailer actions as well as a shift in timing of shipments into Q2 ahead of project implementation.

Domestic consumption grew versus last year across baby gear and baby care category.

<unk> showed some resiliency given the non discretionary in nature of the products, we continue to strength the strength.

Industry, leading.

Turning cost seats, a major new innovations under both graco and baby Jogger brands.

Furniture collection is also delivering very strong performance.

For writing given the timing shift of some retailer orders for back to school into the first half of the year, it's more appropriate to focus on yesterday performance.

Core sales increased low single digits year to date with domestic consumption also up versus last year. During the back to school season. The category grew modestly as a strong start start due to earlier store resets was followed by a slowdown for the end of the season.

We held our ground despite supply constraints across several categories, including mechanical pencils ballpoint pens and highlighters.

<unk> markets and glue sticks for the best performing categories during the back to school season for Us.

Yesterday, the office channel has seen steady growth as return to office continues to progress.

While work is already underway in preparation for next year's back to school season, as we look to the balance of this year, we're excited to expand our offerings in the wide Brent children's activity category, We recently launched our squishy.

Do it yourself kit includes everything to make your own surprise squishy Doi in just 60 minutes. This is a fun new way to unlock creativity and imagination with kids and an exciting expansion of the <unk> brand into an adjacent category.

We are continuing to invest in innovation and brand building and driving and ensure we have the right price pack architecture in key markets that convey a strong value.

2022 has been a dynamic here as it relates to the operating backdrop consumer and customer behavior as well as the overall macroeconomic and geopolitical environment 2022 has also been a tale of two cities.

New brands, but strong first half results followed by a significant slowdown in the back half.

We've been very disciplined with pricing actions.

Over the past two years to help mitigate the impact of massive inflation.

Despite progress on productivity and pricing, we do expect to take a step backwards on gross margin. This year due to fixed cost deleveraging the high level of inflation and unfavorable currency impact.

However, we remain as committed and focused as ever to rebuilding gross margin reaching.

Breaching benchmark levels over time through productivity initiatives inclusive of project out of it and automation.

To being very disciplined around launching gross margin accretive innovation three significant pricing actions internationally to offset the impact of transactional FX for proactive price mix in category management as we are.

Assessing additional opportunities.

<unk> optimized category mix within each business unit.

Strong emphasis on revenue growth management.

Taking an even more aggressive stance on SKU reduction and supply network optimization.

With the macro drop backdrop getting more difficult in recent months, we expect economic uncertainty and extent of the destruction to persist in the near term.

As a result, we think it's prudent to plan for a recessionary environment in 2023 with the softer top line.

Acting with speed and agility as we adjust our playbook to this environment, while taking actions that are within our control to maximize profits and cash.

In that context that top five priorities. We are laser focused on include number one accelerating cash flow generation.

Secondly, rightsize the company's inventories number two driving a recovery in gross margins as we turbocharge productivity and price internationally to mitigate transactional foreign exchange impact number three significantly reducing overheads, both in the U S and internationally.

By leveraging the scale of <unk>, while closely managing discretionary expenses and optimizing.

Advertising and promotion spending as well as the company's office footprint.

And finally, redirecting investment towards higher margin businesses.

In particular, writing to turbocharge innovation and two.

Best leveraged the power power brands and diverse portfolio to meet consumer and customer needs and delivering the next level of simplification and complexity reduction by accelerating S. SKU rationalization.

Hans farming manufacturing operations, and creating a portfolio of Mega brands.

Importantly, we're applying a balanced approach between ensuring we effectively navigate through the short term challenges and volatility while maintaining the long term focus.

Ultimate goal is to position the company to come out even stronger as the macro improves we will harness the strength of our brands built on our E Commerce and omni pro is leverage our scale to drive a one youll approach to realize synergies reduce international fragmentation.

Continue to transform our supply chain to focus on manufacturing efficiencies and vigorously.

<unk> complexity to build competitive advantage and drive sustainable and profitable growth.

The decisive actions we've taken over the past several years.

Pandemic related challenges, while executing on the turnaround agenda. We believe have enabled us to be a much more operationally agile and resilient consumer and customer centric company.

Continue to see a long runway ahead for value creation onwards, and upwards and now I'll turn I'll, let Chris.

Thank you Ravi and good morning, everyone third quarter results were generally in line with our updated outlook. During Q3, we enhanced <unk> financial flexibility and maintain strong cost discipline as we took decisive action to lessen the effect on our business from retailer inventory rebalancing softer consumer demand.

Inflation and a stronger dollar.

Alts were impacted by topline deleveraging as well as the actions we took to manage the company's supply plan.

Net sales for the quarter decreased 19, 2% year over year to $2 3 billion.

Driven by lower core sales the impact of the sale of the <unk> business at the end of Q1 unfavorable foreign exchange and certain category and retail store exits.

Core sales declined 10, 8% as lower volume more than offset higher pricing core sales were negatively impacted by a significant pullback in orders from major customers as they rightsize their inventory. The previously disclosed timing shift of customer orders from Q3 to the first half lowered core sales.

This quarter by a couple of points.

Normalized gross margin declined 120 basis points to 29, 4% versus the same period last year fixed cost deleveraging and significant headwinds from foreign exchange and inflation more than offset benefits from pricing and fuel productivity savings.

Normalized operating margin contracted 120 basis points versus last year to 10, 2% as an increase in advertising and promotional expense as a percent of sales and gross margin contraction more than offset the benefit from lower overhead costs.

Net interest expense declined $8 million from the year ago period to $57 million.

The normalized tax benefit was $58 million, largely reflecting a significant benefit from discrete tax items during the quarter.

This resulted in normalized diluted earnings per share of <unk> 53.

Close to 54 cents a year ago.

Turning to segment results core sales for the commercial solutions segment grew nine 2%, reflecting successful pricing actions to cover inflation.

Core sales for the home appliance segment declined 23, 2% driven by softening demand across product categories.

Core sales for the home solutions segment decreased 11, 6% as core sales were under pressure across both the food and home fragrance businesses.

Core sales for the learning and development segment declined nine 9% core sales for the baby and writing businesses contracted against challenging double digit comparisons from last year and were unfavorably impacted by a shift of customer orders into the first half of this year.

Core sales for the outdoor and Rec business declined 18, 4% as performance was hindered by a shift of retailer orders in the first half of this year and softening demand.

Moving on to the cash flow and balance sheet year to date through cash through Q3 operating cash flow was a use of $567 million as an increase in working capital use temporarily extended the cash conversion cycle.

Inventory levels remain elevated due to a significantly greater than expected reduction in retailer orders during Q3 as well as slowing demand.

Furthermore, the timing of our pullback on the supply plan weighed on payables.

We continue to adjust our demand and supply forecast to reflect current realities and expect to significantly reduce the company's inventory levels by year end.

These actions should generate a significant amount of cash flow in Q4.

Given the lead times on our supply plan, we do expect to end 2022, with an elevated level of working capital, which we plan to right size in 2023.

This will lead to a significantly lower level of operating cash flow in 2022 than typical with unexpected bounce back in 2023.

In Q3, the company strengthened its financial flexibility by refinancing its prior senior unsecured revolving credit facility upsizing borrowing capacity under the facility to one 5 billion.

Additionally in September Noel raised a $1 billion through the issuance of $500 million of 6.3, 75% notes due 2027 and $500 million of 665% notes due in 2029 and.

In October we used the net proceeds of the offering together with available cash to redeem $1 1 billion of outstanding Senior notes that were coming due in April of 2023.

We've cleared the runway on our debt profile and do not have any major maturities until mid 2025.

For the remainder of the year, we expect the macroeconomic and operational environment to remain difficult with further pressure from retailer inventory reductions.

Due to high inflation on essentials, we expect discretionary spending levels to remain constrained pressuring shoppers and driving continued normalization in demand.

And we expect significant headwind from foreign exchange given the strengthening of the U S dollar against other currencies.

We are essentially moving to the lower end of our previous outlook for full year 2022, as we reflect these assumptions as well as our Q3 results.

Our updated net sales forecast is 935 billion to $9 $43 billion.

As we expect a core sales decline of 3% to 4% we continue to forecast a nearly 8% headwind from the divestiture of the CHS business foreign exchange certain category exits and closure of some Yankee candle retail stores.

For the full year, we expect a high single digit benefit from price increases to be offset by a low double digit decline in volume.

This guidance contemplates normalized operating margin contraction of about 70 to 100 basis points versus last year to 10.

Percent of 10, 3%, we are updating the normalized earnings per share outlook to $1 56 to $1 61, and anticipate a tax rate in the mid single digit percent range.

As a result of higher than anticipated inventory levels and additional updates to our supply plan that will negatively impact payables. We now expect to deliver operating cash flow is significantly below our prior guidance range of $400 million to $500 million.

For Q4, we are forecasting net sales of $2 8 billion to $2 two 6 billion.

Including a core sales decline of 9% to 12% and a more than 10% headwind from the sale of the CHS business foreign exchange certain category exits as well as closure of some Yankee candle retail stores.

We expect normalized operating margin of five 1% to six 5% as compared to nine 9% last year, reflecting significant fixed cost deleveraging and an increase in A&P to sales ratio.

We are forecasting normalized earnings per share in the mind of 2014 range with a normalized effective tax rate in the high teens range and a similar share count for Q3.

While it is too early to discuss specific guidance for 2023, we want to provide some context on how we are approaching next year.

We expect the external environment to be difficult next year, and we are taking significant actions across all areas that are within our control to ensure we navigate this backdrop as well as possible and position the company to thrive in a post recessionary environment.

Specifically for next year, we expect consumers disposable spending power to remain under significant pressure due to inflation in food housing and energy.

We expect continued normalization of home and outdoor categories from Covid peak demand levels, and we expect retailers to plan open to buy dollars for general merchandise category as conservatively as we likely move into a more recessionary environment.

As such we intend to plan the topline prudently and are looking at a number of different scenarios to ensure we set the cost structure and supply plans appropriately.

Currency is expected to be a meaningful headwind based on spot prices. This was largely driven by the euro yen and pound to combat. This we are planning for significant incremental pricing actions outside the U S to protect the structural economics of the business and mitigate the transactional foreign exchange impact, particularly in <unk>.

<unk> in Europe .

We expect supply chain pressures to ease as there is greater availability of ocean containers freight carriers and raw materials, and we expect a significantly more favorable cost inflation environment as both commodity and transportation prices move off their peaks and the Chinese Yuan devalued versus the U.

The us dollar.

We are planning to take significant actions to accelerate productivity and efficiency throughout the organization, including accelerating fuel productivity plans driving automation and fully implementing project oven based on the strong results. We achieved during the first go live this past July .

In combination we expect this to yield a recovery of gross margins from this year's depressed levels.

We are also planning to take significant actions to rightsize overhead costs based on the simplification agenda, we've been driving over the past few years. We are early in the planning stages for this and we will share more details in the next few months.

We also expect to bounce back on cash flow from timing of inventory purchases and payables.

We've made a tremendous amount of progress over the last three years to four years that we believe positions us to be much more resilient at managing the external headwinds and quickly pivoting our plan of action in response to changing external dynamics. It takes time for the impact from these actions to be fully reflected in the companys results, particularly.

Given the long lead times on sourced businesses.

However, we are taking the necessary steps to optimize <unk> cost structure reduced inventory and maximize cash flow. So that we are in the best position to navigate through this dynamic environment.

We will provide more details on our fourth quarter call. We remain laser focused on maintaining operational agility and strategic execution to position <unk> for sustainable and profitable growth over the long term.

Operator, let's open up for questions and answers.

Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone keypad. One moment. Please for first question.

And our first question coming from the line of Bill Chappell from Joseph Your line is open.

Thanks, Good morning.

Good morning, Bill Good morning, Bill wanted to a little more color on kind of the inventory reductions at retail as you go into seasonal categories in particular, like appliances, where youre gearing up and shipping.

To make sure all the shelves are stocked and how is that working and do you feel like we're kind of done with the process, where youre aware of where all the reductions will come or are there still other categories.

You have to hit peak season, where this could happen again.

Go ahead, yes.

I think what we're seeing is retailers continue to pull back on inventory levels, particularly at many of our top retailers in the U S and so what we've contemplated in our guidance is very much a continuation of that dynamic in Q4.

That we saw starting in Q3.

We are trying to navigate it as best as possible our inventory positions at retail continued to be.

In good shape.

It's more that we're getting caught up with.

Broader actions that retailers are taking.

In some cases as we're heading into the holiday season, we're concerned that retailers are operating with lower than what we would like inventory levels on our items.

But we expect that retailers are continue because they are overstocked and general merchandise broadly we think the environment remains challenging through at least the end of this year.

And that's what's contemplated in our guidance.

Just what I'd add there is.

Unfortunately for US a lot of the.

Buildup of inventory.

Some of our key customers.

Yes.

Either private label or a competitive product or other categories thoughts related to us.

They have got to work that down before they consider us and even though our inventory levels have good shape are as Chris mentioned, some places where we are actually a little concerned that is.

As approaching lower levels.

I think this could.

That reduction, even though we're hearing things, where they're beginning to get get a hold of this it could continue all the way through like first quarter of next year. So we're taking a prudent view of it.

And.

And Thats also affecting our own.

Our views on how we are managing inventories.

<unk>.

Our supply plans, where we're taking very strong action to make sure that we're not overbuilding.

Got it thanks for that color and then just one follow up maybe just looking at BB since you have.

So many price points from from.

In popular price to Super premium are you seeing consumer trade down happening in that category or is it kind of a proxy for others or is it is that more of a recession resistant type area where.

People want the Super premium holds up extremely well.

Yes, I wouldn't call it Super premium, we're probably premium with Graco and then.

And really appealing to a very broad segment with graco, and maybe baby jogger little bit more on the higher end I think our brands are really despite.

Looking at Q3, so if you look at yesterday and if you look at how our baby business is done versus 19.

And even worse is training.

<unk> to show a positive Pos our brands on Graco Baby Jogger quite really strong this new.

Innovation that we introduced which is the 10 to me for infants, which has been a big pain point.

Patents I think is really doing extremely well.

We just introduced.

And one of the club.

<unk>.

Another innovation and that is just selling extremely well with an online retailer.

On their time diabetes saw strong baby business. So we're not seeing the phenomenon now recognize.

Being the leaders, we took price increases first and.

So as time off the <unk>.

Other competitors have.

That time, because we are the leader in and some of them may not quite following but I think our brand strength speaks for itself now there are few items were.

<unk> been quite focused on margins as well in the baby business Interestingly has held up gross margins this year.

So overall, we feel pretty good about the operational health of the baby business.

Great. Thanks, so much.

Thank you amongst our next question.

And our next question coming from the line of Kevin Grundy with Jefferies. Your line is open.

Great. Thanks, good morning, everyone.

First question for you on debt leverage and free cash flow.

So you finished the quarter at three nine times.

The business is under pressure for all the reasons discussed.

Well as the drag from working cap.

Questions. One if you could just perhaps discuss the cadence around the improvement that you're expecting and working capital maybe some parameters around what we should expect with free cash flow and free cash flow conversion.

And Relatedly, maybe just touch on your covenants and then how youre thinking about sort of stress testing the model given the difficulty of the environment.

Well as the stronger dollar so your thoughts there would be helpful. And then I have a quick follow up.

Yeah sure so.

Clearly this year is going to be under pressure due to working capital. If you look at the inventory level.

We are operating at at the end of September , we're probably about $500 million higher than a typical level and because we've made an intervention to pull back on the supply plan, that's having a negative impact on our payables.

And so the combination of that has working capital being a significant use of cash in the short term, we expect inventory levels to go down at the end of Q4 versus Q3, but we don't expect them to get to sort of a going level until we get into the first half of next year payables will lag that of <unk>.

Little bit because of the supply plan pullback, but.

But we do expect to rightsize working capital in the first half of next year. The net result of that is that we're likely to have free cash flow.

For this year being negative for the company, which will result in a temporary phenomenon of leverage being higher.

Then what we would like but we expect very much to recover during next year as we rightsize the company's working capital. So I would expect that we will see a.

Below out.

A low free cash flow year. This year because of this working capital phenomenon and a bounce back in 2023 from a covenant standpoint, we're in great shape.

And we've looked at a number of different scenarios both for the current year and for next year and we have no concerns over the cover over covenants.

Going forward last thing I will say is that we continue to be committed over the mid <unk> over the mid term to get the leverage ratio down to two five times.

Because of the free cash flow dynamic.

This year, we will likely end this year with short term debt on the balance sheet.

And I expect next year, we'll pay that short term debt down.

Okay very good thanks for the color there, Chris just a quick follow up on Amit.

Yes.

It clearly is going to unlock a lot of value for shareholders longer term. The worry of course is sort of the near term in the macro environment so related to that.

Does the environment change the pace through the scope of Ahmed.

Then two as we just sort of think about our models.

For next year can you quantify the potential benefit from Amit.

Thinking about the likelihood of top top line deleverage in currency.

Thanks for that and I'll pass it on.

Yes, sure. So first of all on the timing question on avid.

We are very.

Cited about the implementation that we went through in July I think I commented on this earlier on the last call that that.

The execution of that first wave went very well and everything we're seeing today would suggest that if anything better than we expected and so that has given us a lot of confidence.

And the overall model, we are not changing the timing of the initiative and we plan to do the second and final wave early in 2023, and we're very much on track to do that.

We.

Four.

Two of the new mixing centers I think I talked previously about the Newbuild distribution center being up and running.

Less.

Bring the gastonia or new distribution center outside of Charlotte.

Go live next month, and so we're a few weeks away from that coming online.

And we feel very good about the progress. The net result of project of it going second wave happening in the first part of next year.

We expect higher than typical fuel productivity savings next year as a result of project Ahmed.

Too early to quantify.

The exact amounts of overall productivity savings, but certainly with project avid <unk>.

Being a major contributor.

We're expecting productivity savings to be.

A higher than normal contributor next year than what it's been this year.

Okay very good thank you.

Thank you one months our next question now.

Our next question coming from the line of Andrea Teixeira with Jpmorgan. Your line is open.

Thank you. So can you please speak on the cadence of the retailer Destocking.

And if you could I understand from your comments that this is going to linger.

But if you.

Could potentially lap it by Q1 next year.

And to your point about the low single digit shipment decline.

Fully as Youre tracking what is your estimate of the volume consumption decline compared to that low single digits I'm, assuming it's lower but I just want I may confirm given the destocking.

Yes, I think let me take a shot at it and then maybe Chris can add to it.

To parse the question in a few things.

Look one is that we did take significant price increases so as of.

<unk> said, we've had a bounce up from price increase, but obviously unit volume.

Has declined.

And so that's sort of pub wash if you will.

And so that trend I think.

You are going to see that.

And that's what's embedded in our overall revenues.

Because there's other headwinds as well that come into play.

Volume is depth of unit volume has definitely been negatively affected but we're glad we took the price increases when we did and we will continue next year.

To drive the price increases internationally from a cadence standpoint, I think it's tough for us to really predict how the retailers will react what we're trying to do is work at all levels of our retailers given our strong relationships brand by brand SKU by SKU.

You can see where a safety.

Safety stocks are really coming down and where theyre very good high velocity items, where it may be.

Gone too low to work with them to work on improving.

Because we don't have the problem is that fair overstock. Our issue is really to make sure that we get to appropriate levels.

So.

When I said first quarter of next year that this could continue it's that's just a.

Based on everything we're seeing saying it could happen earlier, but that's our sort of best guess I don't think theres, a specific cadence stroke, because we can't predict where they are and just to quantify what Rob is saying our guidance for the full year for core sales to be down 3% to 4% that includes a high single digit contra.

Abuse and from pricing and a low double digit decline in volume for the year.

Okay.

So thats just one clarification on that low double digits like what are the categories again that obviously the.

The ones that we're benefiting the most from consumption Ryan home fragrance Susan.

Storage and small appliances can you talk to the ones that are not being as impacted.

But the one stat look where the.

The unit declines is occurring the most is obviously I think appliances to Australia.

Sure.

One because of the stimulus.

And we're I think and given that our long purchase cycles. That's why that business is the most severely affected.

And the unit volumes that are also negatively affected in home fragrances, because they've lost a ton of low income consumers who came in due to the stimulus. So those would be how the two businesses.

And then third would probably be.

Outdoor in certain categories.

We're continuing to do well.

Said, the commercial business continues to do well in our writing business yesterday were up.

Low single digits in terms of growth in writing so those would be the two businesses that are still doing well and then on food buckets of food like the ball brand has continued to do extremely well for us as well as Robert made in Rubbermaid brilliance is doing extremely well. So those would be a quick snapshot of where we are.

Got.

Super helpful. Thank you.

Thank you one month with our next question.

Our next question coming from the line of Stephen Powers with Deutsche Bank. Your line is open.

Hey, great Thanks, and good morning.

As part of.

Your preparations for the environment you foresee ahead, you talked about.

The prioritization of SKU simplification, and obviously inventory reduction I guess.

Left wondering are there other charges obsolescence charges or outsized outside.

Outside the promotions that you foresee as part of accomplishing that simplification are clearing that inventory that's question number one.

And then I'm also curious as to how.

Your preparations for the year ahead.

<unk> impact your new product agenda for 'twenty three.

In terms of the innovation you are going to bring to market.

Is that likely a reduced agenda, a more focused agenda.

How youre thinking about innovation into a much more difficult environment for the consumer.

So.

Soon.

Answer the innovation piece.

Yes.

Chris talked about.

Inventory reductions and one of the things to understand this are obsolete.

Really not the greatest sense more excess that theyre, no expiration date, but Chris Brian drab profile on that piece and then I'll pick up on the innovation side, Yes, as Ravi said.

It's unlikely that we're going to have significant obsolescence charges. We don't we don't see that as an issue in the background for that is the way that we're planning to right size, our inventory is predominantly through reducing the supply plan.

And we think that's the better way to do it because that avoid disrupting the marketplace by trying to liquidate product in the market at at excess of discounts.

Most of the higher than going level of inventory that we have as Ravi said is good inventory that doesn't have an exploration date, that's excess rather than things that have been discontinued and so.

The one thing that that will impact in terms of the P&L that we're seeing and is embedded.

No no no.

Our Q4 guidance is that as we pull back on the supply plan there is manufacturing fixed cost absorption issue.

And thats, probably affecting the Q4.

Gross margin by maybe 100 basis points or so.

Because of the actions, we're taking that as a temporary phenomenon, but we think it's the right thing to do for the long term.

So let me tackle the second part of your question.

And let me start.

A little bit on on this secure reduction we're continuing to be aggressive in the sense.

Yes, we started with over 100000 Skus, we were down to 37, hopefully by the end of this year will be more like 30.

Long term our goal is to get to 15 20000 skus. So.

What that means is we've got to be very focused on not just SKU reduction, but new SKU generation and thats, where were putting a lot of attention.

Is to make sure our marketers are not spending a lot of time generating disk refreshes.

And new Skus.

And generating activity, which then.

Further creates proliferation.

So one of the evolutions Sofia innovation operating model is really on innovations that are bigger better and more consumer which are meaningful and also prioritizing the businesses, which have the higher gross margins. So.

Actually we're.

Investing even more.

And on the writing side on the writing business in totality and creating in addition to your normal line extensions.

To really create us group within the writing group that is looking at breakthrough innovations, whether it's digital or with the whole new was of the matter worse et cetera. So.

Because I think innovation is still at <unk>.

Is the heartbeat of this company and part of the DNA, but it has to be very much gross margin accretive. So we're very feel.

Feel very strongly also second that there are meaningful sizes. So it would take for instance.

The ones that I just talked about.

Great co and baby Jogger tend to me they are real meaningful innovations there now.

Wrap it have very good consumer velocity since they've been introduced so.

Lot more focus on not only consumer insight driven enforced side, driven but also customer acceptance.

And also another plank is to make sure. It's not just at the premium end, but we have the right and good better best offerings because in recessionary environments. The value focus becomes very important. So we are putting a lot of emphasis on price pack architecture, and making sure. We've got the right sort of pack sizes.

And.

We're hitting the right types of price points.

So.

<unk>.

Yes, we have said hey next year.

We're being prudent on.

<unk> top line that doesn't mean that we are in any way backpedaling on innovation because when the macro improves we want to be the strongest company that emerges because of all of the investments we've made in capabilities, which we've done a lot and that our execution than really progress comes into play.

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

Thank you.

Next question.

And our next question coming from the line of Olivia Tong with Raymond James Your line is open.

Great. Thank you.

The first question is on cash and it's just around given all the pressures that we're seeing that are now extending into next year.

It creates a bit of a tough spot with respect to the dividend. So I was wondering if you could update us on your priorities with respect to cash.

In light of the.

Challenges and clearly your desire to continue to reign in your debt levels.

And then just one quick clarification I think you said that you expect to.

The increase in Q4, just if you could give a little bit more detail around that.

That'd be great. Thank you.

Yes.

Yes, So let me tackle the cash question.

Our focus remains consistent.

We believe we've got an opportunity to generate significant operating cash flow and that's our first priority with regard to capital allocation.

Our cash flow, we continue to invest in the business, where we see strong.

Our return on investment projects and typically we're looking for 30.

<unk>, 30% plus rates of return on that capital investment.

Beyond that we pay a dividend I think we've been relatively clear that we expect to maintain as flat. We continue to expect that theres been no change in our outlook on the dividend.

In the short term because of the increase in working capital that I mentioned thats, putting pressure on cash flow. This year, we will wind up with short term debt at the end of this year and a higher leverage ratio than typical but we view that as a temporary phenomenon and we believe that we are going to write.

Our working capital in the first half of next year with that right sized working capital in the first half of next year, we will use that to.

To pay back to pay down the short term debt.

Is the current plan the ultimate goal of getting to a two and a half leverage ratio in the mid to long term remains the same.

Yes.

Question really.

The ratio because.

With the top line coming down.

Obviously.

The ratio look higher but I think look we've got two things Kevin we talked <unk> got also lot of the displays and stuff that you need with holiday and second that we have new product launches et cetera.

<unk> them, but we have right sized our A&P spending.

Making sure that it is against the businesses with the higher margins and where it makes the most sense.

Got it thanks, and then just on the cost savings.

If I remember correctly, Amit as opposed to help out quite a bit in fiscal 'twenty three so just thinking through.

How if at all.

Ability to extract savings from Amit changes.

Given given perhaps a little bit of a change in terms of expectations for 'twenty three.

Yes, I don't think I think if anything on the savings from Ahmed we're seeing more opportunity today than we saw when we started the project and.

And for a variety of reasons.

As we've gotten into the project and modeled our transportation as we've shifted the company from collect freight to prepaid freight.

As we.

Diversified our port exposure.

We now have a lot more levers to pull to navigate.

The external environment.

When we started off at transportation costs were lower than where they are today, even though today transportation costs are starting to get a little better from peak levels, they're still well above.

Where we were when we started off at and if you recall of it was in part about reducing the miles driven <unk>.

Shifting our business to be have more port diversification better service for our retail customers and take 40% of the miles driven out.

And the benefits in terms of transportation savings from that.

Main higher than when we first initiated the project.

Understood.

Thank you our next question.

And our next question coming from the line of.

Laura Lieberman with Barclays. Your line is open.

Great. Thanks, good morning.

And it was great you gave a little bit of kind of guard rails are thinking around around 'twenty three but one of my question is that.

As you work through excess inventory, how should we think about the negative operating leverage that comes out of that because I know you talked about both bounce back in operating cash flow.

And expectation to recover gross margins so.

Yeah.

Let's just start with that if you could help us how do we think about the negative operating leverage that occurs with working through excess inventory.

Yes, good good good point Lauren.

And Youre right.

We're working through excess inventory by pulling back on the supply plan.

That does create fixed cost deleveraging and that's reflected where youre seeing that is in our Q4 guidance I think I mentioned in response to a previous question. It's about 100 basis points of pressure in Q4 from that fixed cost deleveraging associated with pulling back on the supply plan. The interesting thing is we believe we.

Pulled back on the supply plan pretty aggressively across the whole portfolio. The self manufactured businesses, where we have the majority of the fixed cost deleveraging impact we can pull back on the supply plan with about three months notice.

The <unk>.

Our sourced businesses take about eight months of notice. So those are tougher and so a lot of the.

Self manufactured businesses, we believe we pulled back on the supply plan and we're going to be in a reasonably good shape by the end of this calendar year. The source businesses are going to take through the first half of next year, but the source businesses. We don't have the same fixed cost deleveraging impact and as a result.

We may have a little bit of a negative impact next year on an on fixed cost deleveraging, but.

But I don't think thats going to be.

A material driver.

Because of the timing of.

<unk> of this pullback in the way it flows through on the source businesses versus the self manufactured businesses.

Okay. That's super helpful. So the 100 basis points you specified in the fourth quarter I know, we shouldnt give quarterly but I do think cadence is important so something less than that in Q1.

And then as we get into Q2. Additionally, you Shouldnt you think there shouldnt be a fixed cost absorptions.

Fixed cost absorption.

I can assure you when you get into <unk>.

Is that fair, yes, I think Thats, a fair a fair assumption okay.

Okay, Great and then my second question was just on the cost cutting productivity overhead all the <unk>.

Litany of things that Ravi you ran through on the priorities in this sort of actions you're taking.

You are taking that in the context of how much progress. The company has made in the last couple of years and reinvesting in capabilities and rebuilding culture.

How do you manage that dynamic right that this is we're right back Unfortunately, the necessity to make sharp pullback.

<unk> been reinvesting.

We get a better platform so.

I'd just love to hear some color on how you are looking to manage that.

From an aggregate corporate standpoint thanks.

I think thats a brilliant question.

So it is definitely.

We have to make choices.

I think.

Lauren for the very reason you mentioned it gives us the ability to do this in the sense. The culture of the company is in a great place.

Last year the engagement levels, we've gone from 45% to 75, we just got our engagement results last tenant two weeks ago and they were again 75. So despite everything we're keeping the morale up and the culture. So I think what we want to reduce the cost reductions through them.

Very intelligently and not cut muscle and we're very focused on operating models and how we go to market, how we do business.

They're duplication and.

So that we're actually improving how we work.

There's always been a little tension between.

Centralized functions and to be used and how do you optimize that we've been continually working on that and I think we want to provide even greater clarity on.

Clarity so that we don't have duplication international is a place where there is a lot of fragmentation.

And we've talked about that so now that's something we're very heavily focused on.

The first step we've already taken we just announced.

For the first time in your country General.

General manager for Canada, where all of the views out there and we had situations where 44 people in Canada reported a party for people in the U S. And we just think that's a lot of duplication and said we want that cleaned up so that's a one year old approach and so we think that there.

There are ways of doing this.

Get very efficient and just like we've done avid in the hole.

Distribution side, we think there are a lot of manufacturing efficiencies from our factory side and looking at Hey, what are the things that we can do there, but the network taking ahmet moving now to international given the success in the U S. So we still think that there is enough for us to do.

To give us a real meaningful reduction in overheads and efficiencies.

And I already mentioned the SKU side without.

Damaging the culture.

And whatever we do we're going to do it very thoughtfully and with a whole people first mentality.

Thank you and I'm sure we will have time for one more question one moment our next question.

And our last question coming from the line of Peter Grom with UBS. Your line is open.

Hey, good morning, I guess good afternoon now I hope you guys are doing well. So I just wanted to follow up on the comments you made around in a recessionary environment and preparing for a softer top line.

Year can you maybe just provide some context around that particularly in light of how the top line has progressed this year and into the fourth quarter or is there any way to quantify what a softer top line environment looks like from a core sales perspective would you expect to see similar declines we're seeing right now should should things kind of improved because I know a lot of the impact right now.

It is being driven by retail inventory, destocking, which should improve but it also sounds like you expect.

<unk> can become a much bigger drag from here as well so just any thoughts on how to think about that more broadly at this point in time would be helpful. Thanks sure.

Sure Peter.

And not to be Q3, we'll quantify that in February .

Bob.

But I'll give you some qualitative views if I could I think.

The thing that we don't want to be it is the first and foremost it's almost impossible to quantify right now.

Where the whole categories for me, where the macro a little bit because.

You just saw the GDP in Q3, it actually was a little surprising for the country that.

Turned out better, but it's a mixed message so it's very tough.

Our stance on it is more from a timing perspective.

Got it.

Don't hope that that would be a very robust topline and instead make sure our.

Laser focus next year to deliver on number one priority.

Get those inventory introduction in cash cash cash that's number one number two gross margin gross margin number three operating margin. That's what we're thinking about and the rest for US is hey have you made sure of that and don't get yourselves lull because during.

Covid, we had that big bump up 12, 5% growth.

First half we were up 4%. This year. So we want to make sure because it takes time for an organization to pivot. So we think it will be very responsible to be prudent about the top line, which then allows us to take all the actions necessary.

Look at everything that we're going to control, we're going to do extremely well the macro is something we don't control. So we take all of those actions and will continue to innovate in the top line. If it does better that would just be icing on the cake. We just want to make sure that the organization understands the pivot that is.

It's very important to be efficient and we've got to get those operating margins up and got to get cash flow. That's how we're approaching it.

So I think we'll have another quarter to see where we are where we can guide appropriately but are planning stance is planned for the worst and then you can execute extremely well based on that so that's our stance it stop being conservative it's not it's very tough to predict right now.

Okay.

Okay. Thank you all for joining.

Thank you very much.

Sure.

Thank you, ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Good morning, ladies and gentlemen, and welcome Danielle Brands' third quarter jointly to earnings conference call at this time all parts.

<unk> are in a listen only mode.

Discussion by management, we will open up the call for questions.

To stay within the time scheduled for the call. Please limit yourself to one question during the Q&A session.

As a reminder, today's conference is being recorded.

Live webcast of this call is available at IR, Danielle O'brien Dot Com I will now turn the call over to Sophie <unk>, Vice President of Investor Relations.

You may begin.

Thank you good morning, everyone and welcome to Newell Brands' third quarter earnings call on the call with me today are Ravi <unk>, our CEO and Chris Peterson, our president and CFO before we begin I would like to inform you that during the course of today's call, we will be making forward looking statements.

Risks and uncertainties actual results and outcomes may differ materially.

No obligation to update forward looking statements.

For you to the cautionary language and risk factors are available in our earnings release, our Form 10-K Form 10-Q, and other SEC filings available on our Investor Relations website for further discussion of the practice 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.

These non-GAAP measures.

So to investors, although they should not be considered superior to the measures presented in accordance with GAAP explanations of these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as in other material on Merrell or Investor Relations website. Thank you and now I'll turn the call.

Over to Robin.

Thank you Sofia.

Good morning, everyone and thank you for joining us on our third quarter call.

And following strong performance over the first half of the yet the company's results decelerated in the third quarter, reflecting a tough operating environment as many retailers rightsize their inventory positions inflationary pressure on both the consumer and our business.

The impact of a stronger dollar. Additionally, Q3 performance was unfavorably impacted by customer shifting orders into the first half.

As a result of these factors cost outs turn negative in the quarter declining 10, 8% on top of three 2% growth last year.

This had a corresponding.

Deleveraging impact on normalized operating margin, which contracted 120 basis points year over year, despite strong progress on productivity and cost containment actions.

Cost has declined yet over yet in all business units, except the commercial business as the pullback in customer orders was a significant headwind.

International markets outpaced automatically.

We did not experience the same level of retailer inventory reductions that courthouse outside North America declined one 4% as four 8% growth in Latin America was offset by declines in EMEA and Asia Pacific.

Consumer confidence due to record inflation and concerns surrounding the war in Ukraine continued to weigh on the EMEA region with APAC region impacted by Covid related restrictions and lockdowns in certain markets.

Yesterday <unk> core sales declined one 3% on top of a challenging 15, 2% growth comparison, a year ago as normalized operating margin expanded 10 basis points year over year, despite significant inflationary.

And foreign exchange headwinds.

Many of our key brands continued to show strength yesterday.

Including Rubbermaid commercial products Sharpie paper mate X, Adam Meyers ball Rubbermaid and Contigo wildly.

While domestic consumption moderated yet over yet.

<unk> 2019 levels, both during that quarter and year to date.

Going forward, we expect demand patterns to continue to be unfavorably impacted by inflationary pressure on the consumer which is constraining discretionary spending, particularly for value driven shop us.

Due to concerns about the high price of everyday goods and gas a potential recession rising interest rates and declining personal savings rate, we are seeing a more cautious consumer today.

But one that is willing to purchase an offering that provides good value there.

<unk> been optimizing our product assortment to ensure it provides the appropriate value proposition to the consumer.

We have also been activating shopper campaigns with a focus on value messaging to better connect with shoppers adding customers.

The commercial business unit, let's say true standout this quarter and yet today registering courthouse growth of 9% in both time periods enabled by excellent execution and strong price realization with innovation and assortment hyper focused on reducing cost in use.

And delivering savings to our end users it is leading to positive momentum in our <unk> and professional customers and distributors.

And the <unk> professional channel was further fueled by improved mobility and return to the office as well as distribution gains, which helped offset the impact of moderating traffic at retail in the <unk> channel customers seek performance quality.

Strong.

And strong durability, all of which are at the core of our rubbermaid commercial product offerings.

As a result of shifting consumer behaviors.

The decision the decision by many retailers to aggressively manage the inventory levels and reduce autos weighed on performance on the majority of our consumer facing businesses.

<unk> core sales declined four six business units during the third quarter.

We do not believe this is indicative of underlying operational health issues, but rather that dynamic environment. We're in.

As well as base period comparison.

Let me illustrate this point for a discussion of our baby and writing business unit.

The baby business was cycling against a challenging double digit courthouse growth comparison.

Domestic consumption grew versus last year across baby gear, and baby care category, which showed some resiliency given the non discretionary nature of the products, we continue to strength the strength.

Industry, leading.

Turning cost seats, a major new innovations under both graco and baby Jogger brands.

Nature collection is also delivering very strong performance.

For writing given the timing shift of some retail orders for back to school into the first half of the yet it's more appropriate to focus on yesterday performance.

Core sales increased low single digits year to date with domestic consumption also up versus last year. During the back to school season. The category grew modestly as the strong start due to the earliest store resets was followed by a slowdown for the end of the season.

We held our ground despite supply constraints across several categories, including mechanical pencils ballpoint pens and highlighters.

Today's markets and glue sticks for the best performing categories during the back to school season for Us.

Yesterday, the office channel has seen steady growth as return to office continues to progress.

While work is already underway in preparation for next year's back to school season, as we look to the balance of this year, we're excited to expand our offerings in the white bread children's activity category.

Recently launched as more squishy.

This do it yourself kit includes everything to make your own surprise squishy Doi in just 60 minutes. This is one of the new way to unlock creativity and imagination with kids and an exciting expansion of the <unk> brand into an adjacent category.

We are continuing to invest in innovation and brand building and driving and ensure we have the right price pack architecture in the key markets that convey a strong value.

Results, followed by a significant slowdown in the back half.

We've been very disciplined with pricing actions over the past two years.

Mitigate the impact of massive inflation.

Despite progress on productivity and pricing, we do expect to take a step backwards on gross margin this year due to fixed cost deleveraging.

High level of inflation and unfavorable currency impact.

However, we remain as committed and focused as ever to rebuilding gross margin, reaching benchmark levels over time through productivity initiatives inclusive of project avid and automation.

To being very disciplined around launching gross margin accretive innovation.

The significant pricing actions internationally to offset the impact of transactional FX.

Our proactive price mix in category management.

Assessing additional opportunities.

Optimize category mix within each business unit.

And our strong emphasis on revenue growth management.

Taking an even more aggressive stance on it.

SKU reduction and supply network optimization.

With the macro drop backdrop getting more difficult in recent months, we expect economic uncertain mechanics out of the disruptions to persist in the near term.

As a result, we think it's prudent to plan for a recessionary environment in 2023 with the softer top line.

Acting with speed and agility as we adjust our playbook to this environment, while taking actions that are within our control to maximize profits and cash.

In that context that top five priorities. We are laser focused on include number one accelerating cash flow generation as we significantly rightsize the company's inventory number two driving a recovery in gross margins as we turbocharge productivity and pricing.

Internationally to mitigate the transactional foreign exchange impact number three significantly reducing overhead both in the U S and internationally by leveraging the scale of <unk>.

Closely managing discretionary expenses and optimizing adverts.

Advertising and promotion spending as far as the company's office footprint.

And finally, redirecting investment towards higher margin businesses.

In particular, our writing to turbocharge innovation and two.

Farming manufacturing operations, and creating a portfolio of Mega brands.

Importantly, we are applying a balanced approach between ensuring we effectively navigate through the short term challenges and volatility while maintaining the long term focus.

Ultimate goal is to position the company to come out even stronger as the macro improves we will harness the strength of our brands built on our e-commerce and omni prowess leverage our scale to drive a one new approach to realize synergies reduced international and fragmentation.

Continuing to transform our supply chain to focus on manufacturing efficiencies and vigorously.

<unk> complexity to build a competitive advantage and drive sustainable and profitable growth.

The decisive actions we've taken over the past several years.

Pandemic related challenges, while executing on the turnaround agenda. We believe have enabled us to be a much more operationally agile and resilient consumer and customer centric company. We continue to see a long runway ahead for <unk>.

Creation onward, and upwards and now I'll turn I'll, let to Chris.

Thank you Ravi and good morning, everyone.

Third quarter results were generally in line with our updated outlook. During Q3, we enhanced <unk> financial flexibility and maintain strong cost discipline as we took decisive action to lessen the effects on our business from retailer inventory rebalancing softer consumer demand inflation and a stronger dollar.

Our results were impacted by topline deleveraging as well as the actions we took to manage the company's supply plan.

Net sales for the quarter decreased 19, 2% year over year to $2 3 billion.

Driven by lower core sales the impact of the sale of the <unk> business at the end of Q1 unfavorable foreign exchange and certain category and retail store exits.

Quarter by a couple of points.

Net interest expense declined $8 million from the year ago period to $57 million.

The normalized tax benefit was $58 million, largely reflecting a significant benefit from discrete tax items during the quarter.

This resulted in normalized diluted earnings per share of <unk> 53.

Close to 54, a year ago.

Turning to segment results core sales for the commercial solutions segment grew nine 2%, reflecting successful pricing actions to cover inflation.

Core sales for the home appliance segment declined 23, 2% driven by softening demand across product categories.

Core sales for the home solutions segment decreased 11, 6% as core sales were under pressure across both the food and home fragrance businesses.

Core sales for the learning and development segment declined nine 9% core sales for the baby and writing business is contracted against challenging double digit comparisons from last year and were unfavorably impacted by a shift of customer orders into the first half of this year.

Core sales for the outdoor and Rec business declined 18, 4% as performance was hindered by a shift of retailer orders into the first half of this year and softening demand.

Inventory levels remain elevated due to a significantly greater than expected reduction in retailer orders during Q3 as well as slowing demand.

Furthermore, the timing of our pullback on the supply plan weighed on payables.

We continue to adjust our demand and supply forecast to reflect current realities and expect to significantly reduce the company's inventory levels by year end.

These actions should generate a significant amount of cash flow in Q4.

Given the lead times on our supply plan, we do expect to end 2022, with an elevated level of working capital, which we plan to right size in 2023.

This will lead to a significantly lower level of operating cash flow in 2022 than typical with unexpected bounce back in 2023.

In Q3, the company strengthened its financial flexibility by refinancing at Pryor senior unsecured revolving credit facility upsizing borrowing capacity under the facility to one 5 billion.

Additionally in September Noel raised a $1 billion through the issuance of $500 million of 6.3, 75% notes due 2027 and $500 million of 665% notes due in 2029 and.

In October we used the net proceeds of the offering together with available cash to redeem $1 1 billion of outstanding Senior notes that were coming due in April of 2023.

We've cleared the runway on our debt profile and do not have any major maturities until mid 2025.

For the remainder of the year, we expect the macroeconomic and operational environment to remain difficult with further pressure from retailer inventory reductions.

Due to high inflation on essentials, we expect discretionary spending levels to remain constrained pressuring shoppers and driving continued normalization in demand.

And we expect significant headwind from foreign exchange given the strengthening of the U S dollar against other currencies.

We are essentially moving to the lower end of our previous outlook for full year 2022, as we reflect these assumptions as well as our Q3 results.

Our updated net sales forecast is 935 billion to $943 billion as we.

The core sales decline of 3% to 4% we continue to forecast a nearly 8% headwind from the divestiture of the CHS business foreign exchange certain category exits and closure of some Yankee candle retail stores.

For the full year, we expect a high single digit benefit from price increases to be offset by a low double digit decline in volume.

This guidance contemplates normalized operating margin contraction of about 70 to 100 basis points versus last year to 10.

Percent of 10, 3%, we are updating the normalized earnings per share outlook to $1 56 to $1 61, and anticipate a tax rate in the mid single digit percent range.

For Q4, we are forecasting net sales of $2 8 billion to $2 two 6 billion.

We expect normalized operating margin of five 1% to six 5% as compared to nine 9% last year, reflecting significant fixed cost deleveraging and an increase in the A&P to sales ratio.

We are forecasting normalized earnings per share in the 9% to 14 range with a normalized effective tax rate in the high teens range and a similar share count for Q3.

While it is too early to discuss specific guidance for 2023, we want to provide some context on how we are approaching next year.

Specifically for next year, we expect consumers disposable spending power to remain under significant pressure due to inflation in food housing and energy.

As such we intend to play on the top line prudently and are looking at a number of different scenarios to ensure we set the cost structure and supply plans appropriately.

<unk> in Europe .

The us dollar.

We are planning to take significant actions to accelerate productivity and efficiency throughout the organization, including accelerating fuel productivity plans driving automation and fully implementing project Aman based on the strong results. We achieved during the first go live this past July .

In combination we expect this to yield a recovery of gross margins from this year's depressed levels.

We also expect to bounce back on cash flow from timing of inventory purchases and payables.

Early given the long lead times on sourced businesses.

However, we are taking the necessary steps to optimize <unk> cost structure reduced inventory and maximize cash flow. So that we are in the best position to navigate through this dynamic environment.

Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone keypad.

Please go ahead first question.

My first question coming from the line of Bill Chappell from Jos Your line is now open.

Thanks, Good morning.

Good morning, Bill Good morning wanted to a little more color on kind of the inventory reductions at retail as you go into seasonal categories in particular, like appliances, where youre gearing up and shipping.

To make sure all the shelves are stocked I mean, how is that working and do you feel like we are.

Kind of done with the process, where youre aware of where all the reductions will come or are there still other categories.

You have to hit peak season, where this could happen again.

Go ahead, yes.

<unk> starting in Q3.

We are trying to navigate it as best as possible our inventory positions at retail continued to be.

In good shape.

It's more that we're getting caught up with.

Broader actions that retailers are taking and in some cases as we're heading into the holiday season, we're concerned that retailers are operating with lower than what we would like inventory levels on our items.

But we expect that retailers are continue.

Because they are overstocked and general merchandise broadly, we think the environment remains challenging through at least the end of this year.

And that's what's contemplated in our guidance.

Just what I'd add there is.

Unfortunately for US a lot of the.

Buildup of inventory.

All of our key customers.

As.

Either private label or a competitive product or other category not related to us.

But they have got to work that down before they consider us and even though our inventory levels had in good shape or as Chris mentioned, some places where we are actually a little concerned that it is approaching lower levels.

I think this could.

Think that reduction, even though we're hearing things, where they're beginning to get get a hold of this it could continue all the way through like first quarter of next year. So we're taking a prudent view.

And.

And Thats also affecting our own.

Our views on how we are managing inventories.

<unk>.

Our supply plans, where we're taking very strong action to make sure that we're not overbuilding.

Got it thanks for that color and then just one follow up maybe just looking at BB since you have.

So many price points from from.

In popular price to Super premium are you seeing consumer trade down happening in that category or is it kind of a proxy for others or is it is that more of a recession resistant type area where.

People want the Super premium holds up extremely well.

Yes, I wouldn't call a super premium, we're probably premium with graco and then.

And really appealing to a very broad segment with graco, and maybe baby jogger little bit more on the higher end I think our brands are really despite.

Looking at Q3, so if you look at yesterday and if you look at how baby business is done versus 19.

And even worse is training.

<unk> to show a positive Pos our brands on Graco Baby Jogger.

Really strong this new.

Innovation that we introduced which is the 10 to me for infants, which has been a big pain point from patents I think is really doing extremely well.

We just introduced.

And one of the club.

<unk>.

Another innovation and that is just selling extremely well with an online retailer.

On their time diabetes saw strong baby business. So we're not seeing the phenomenon now recognize.

Being the leaders, we took price increases first and.

So some of the.

Other competitors have.

That time, because we are the leader in and some of them may not quite following but I think our brand strength speaks for itself now there are a few items were.

<unk> been quite focused on margins as well in the baby business Interestingly has held up gross margins this year.

So overall, we feel pretty good about the operational health of the baby business.

Great. Thanks, so much.

Thank you amongst our next question.

And our next question coming from the line of Kevin Grundy with Jefferies. Your line is open.

Great. Thanks, good morning, everyone.

First question for you on debt leverage and free cash flow.

So you finished the quarter at three nine times.

The business is under pressure for all the reasons discussed.

Well as the drag from working cap.

And Relatedly, maybe just touch on your covenants and then how youre thinking about sort of stress testing the model given the difficulty of the environment.

Well as the stronger dollar. So you thought there would be helpful. And then I have a quick follow up.

Yes sure so.

Clearly this year is going to be under pressure due to working capital. If you look at the inventory level.

Little bit because of the supply plan pullback, but.

But we do expect to rightsize working capital in the first half of next year. The net result of that is that we're likely to have free cash flow.

For this year being negative for the company, which will result in temporary a temporary phenomenon of leverage being higher than what we would like but we expect very much to recover during next year as we rightsize the company's working capital. So I would expect that we will see a.

Below out.

A low free cash flow year. This year because of this working capital phenomenon and a bounce back in 2023 from a covenant standpoint, we're in great shape.

And we've looked at a number of different scenarios both for the current year and for next year and we have no concerns over the cover over covenants.

Going forward last thing I will say is that we continue to be committed over the mid <unk> over the mid term to get the leverage ratio down to two five times.

Because of the free cash flow dynamic.

This year, we will likely end this year with short term debt on the balance sheet.

And I expect next year, we'll pay that short term debt down.

Okay very good thanks for the color there, Chris just a quick follow up on <unk>.

Amit.

That clearly is going to unlock a lot of value for shareholders longer term. The worry of course is sort of the near term in the macro environment so related to that.

How does the environment change the pace through the scope of Ahmed and then two as we just sort of think about our models.

For next year can you quantify the potential benefit from Amit as we're thinking about the likelihood of top top line deleverage in currency. So thanks for that and I'll pass it on.

Yes, sure. So first of all on the timing question on avid.

We are very excited about the implementation that we went through in July I think I commented on this earlier on the last call that.

The execution of that first wave went very well and everything we're seeing today would suggest that if anything better than we expected and so.

So that has given us a lot of confidence.

And the overall model, we are not changing the timing of the initiative and we plan to do the second and final wave early in 2023, and we're very much on track to do that.

<unk>.

Four.

Two of the new mixing centers I think I talked previously about the Newbuild distribution center being up and running.

Last spring, the gastonia or new distribution center outside of Charlotte will go live next month and so we're a few weeks away from that coming online.

And we feel very good about the progress. The net result of project Ovid going second wave happening in the first part of next year.

We expect higher than typical fuel productivity savings next year as a result of project Ahmed.

Too early to quantify.

The exact amounts of overall productivity savings, but certainly with project avid <unk>.

Being a major contributor.

We're expecting productivity savings to be.

A higher than normal contributor next year than what it's been this year.

Okay very good thank you.

Thank you one months our next question now.

Our next question coming from the line of Andrea Teixeira with Jpmorgan. Your line is open.

Thank you. So can you please speak on the cadence of the retailer Destocking.

And if you could I understand from your comments that this is going to linger.

But if you.

Could potentially lap it by Q1 next year.

And to your point about the low single digit shipment decline for the full year, you're tracking what is your estimate of the volume consumption decline compared to that low single digits I'm, assuming it's lower but I just wanted I may confirm given the destocking.

Yes, I think let me take a shot at that and then maybe Chris can add to it I'll try to parse the question in a few things.

One is that we did take significant price increases so as I've said, we've had a bounce up from price increase, but obviously unit volume.

Has declined.

And so that's sort of awash if you will.

And so that trend I think.

You are going to see that.

And that's what's embedded in our overall revenues.

Because there's other headwinds as well that come into play.

Volume is that the unit volume is definitely been negatively affected by credit glad we took the price increases when we did and we will continue next year.

You can see where <unk> safety stocks are really coming down and where theyre very good high velocity items, where may be Dave.

Gone too low to work with them to work on improving.

Because we don't have the problems that were overstocked or issue is fairly to make sure that we get to appropriate levels.

And when I said first quarter of next year that this could continue its thats just stay.

Based on everything we're seeing saying it could happen earlier, but thats, our best guess I don't think Theres, a specific cadence stroke, because we can't predict where they are and just to quantify what Rob is saying our guidance for the full year is for core sales to be down 3% to 4% that includes a high single digit.

<unk> from pricing and a low double digit decline in volume for the year.

Okay.

So thats just one clarification on that low double digits like what are the categories again that obviously the.

The ones that we're benefiting the most from consumption right at home fragrances and.

And for the storage and small appliances can you talk to the ones that are not being as impacted.

But the ones that look we're.

The unit declines is occurring the most is obviously I think appliances is fairly.

Sure.

One because of the stimulus.

And we're I think and given that there are long purchase cycles. That's why that business is the most severely affected second the unit volumes that are also negatively affected in home fragrances, because they've lost a ton of low income consumers who came in due to the stimulus so those could be.

The two businesses.

And then third would probably be.

Outdoor in certain categories.

We're continuing to do well as I've said, the commercial business continues to do well in our writing business yesterday were up.

Low single digits.

So growth in writing so those would be the two businesses that are still doing well and then on food buckets of food like the ball brand has continued to do extremely well for us as well as Robert made in Rubbermaid brilliance is doing extremely well. So those would be a quick snapshot of where we are.

Super helpful. Thank you.

Thank you one moment. Please our next question.

And our next question coming from the line of Stephen Powers with Deutsche Bank. Your line is open.

Hey, great Thanks, and good morning.

As part of.

Your preparations for the environment you foresee ahead, you talked about for the prioritization of SKU simplification, and obviously inventory reduction I guess.

Left wondering are there other charges obsolescence charges or outsized.

Outside of the promotions that you foresee as part of accomplishing that simplification are clearing that inventory that's question number one.

And then I'm also curious as to how.

Your preparations for the year ahead.

<unk> impact your new product agenda for 'twenty three.

In terms of the innovation, you're going to bring to market.

Is that likely a reduced agenda, a more focused agenda.

How youre thinking about innovation into a much more difficult environment for the consumer.

So.

Soon.

Answer the innovation piece.

Chris talked about.

Inventory reductions and one of the things to understand this are obsolete.

Really not the greatest sense more excess that theyre, no expiration date, but Chris Brian drab profile on that piece and then I'll pick up on the innovation side, Yes, as Ravi said.

And we think that's the better way to do it because that avoid disrupting the marketplace by trying to liquidate product in the market at at excess of discounts.

Most of the higher than going level of inventory that we have as Ravi said.

Is good inventory that doesn't have an exploration date, that's excess rather than things that have been discontinued.

So.

The one thing that that will impact in terms of the P&L that we are seeing and is embedded in that.

Our Q4 guidance is that as we pull back on the supply plan there is manufacturing fixed cost absorption issue.

And thats, probably affecting the Q4.

Gross margin by maybe 100 basis points or so.

Because of the actions, we're taking that as a temporary phenomenon, but we think it's the right thing to do for the long term.

So let me tackle the second part of your question.

And let me start.

A little bit on on this secure reduction we're continuing to be.

<unk>.

Yes restarted with over 100000, Skus, we were down to 37, hopefully by the end of this year will be more like 30.

Long term our goal is to get to 15 20000 skus. So.

What that means is we've got to be very focused on not just SKU reduction, but new SKU generation and thats, where were putting a lot of attention.

Is to make sure our marketers are not spending a lot of time generating desk refreshes.

And new Skus.

And generating activity, which then.

That creates proliferation.

So one of the evolutions of innovation operating model is really on innovations that are bigger better and more consumer which are meaningful and also prioritizing the businesses, which have the higher gross margins.

So actually were.

Investing even more innovation on the writing side on the writing business in totality and creating in addition to your normal line extensions.

To really create us group within the writing group that is looking at breakthrough innovations, whether it's digital or with the whole new wars of the matter worse et cetera. So.

Because I think innovation is still at.

Is the heartbeat of this company and part of the DNA, but it has to be very much gross margin accretive. So we are very.

I feel very strongly also second that theyre meaningful sizes. So it would take for instance.

The ones that I just talked about.

Great co and baby Jogger tend to me, they're real meaningful innovations there now.

<unk> have very good consumer velocity since they've been introduced so.

A lot more focus on not only consumer insight driven enforced side, driven but also customer acceptance.

And also another plank is to make sure. It's not just at the premium end, but we have the right and good better best offerings, because in recessionary environments that value focus becomes valued partner. So we are putting a lot of emphasis on price pack architecture, and making sure. We've got the right sort of pack sizes.

And.

We're hitting the right types of price points.

No.

Yes, we have said hey next year.

We're being prudent on.

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

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

Thank you.

Question.

Our next question coming from the line of Olivia Tong with Raymond James Your line is open.

Great. Thank you my.

The first question is on cash and it's just around given all the pressures that we're seeing that are now extending into next year.

It creates a bit of a tough spot with respect to the dividend. So I was wondering if you could update us on your priorities with respect to cash in.

<unk>.

The challenges and clearly your desire to continue to rain on your debt levels.

And then just one quick clarification I think you said that you expect advertising to increase in Q4, just if you could give a little bit more detail around that.

Yeah.

That would be great. Thank you.

Yes, So let me tackle the cash question.

Our focus remains consistent.

We believe we've got an opportunity to generate significant operating cash flow and that's our first priority with regard to capital allocation by with our cash flow we continue to.

Best in the business, where we see strong return on investment projects and typically we're looking for.

30% plus rates of return on that capital investment.

Beyond that we pay a dividend I think we've been relatively clear that we expect to maintain as flat. We continue to expect that theres been no change in our outlook on the dividend.

In the short term because of the increase in working capital that I mentioned, that's putting pressure on cash flow. This year, we will wind up with short term debt at the end of this year and a higher leverage ratio than typical but we view that as a temporary phenomenon and we believe that we are going to write.

Size of our working capital in the first half of next year with that right sized working capital in the first half of next year, we will use that.

To pay back to pay down the short term debt.

Is the current plan the ultimate goal of getting to a two and a half leverage ratio in the mid to long term remains the same.

Yes.

P question really.

The ratio because.

With the top line coming down obviously.

The ratio look higher but I think look we've got two things Kevin we talked <unk> got also lot of the display and stuff that you need with holiday and second that we have new product launches et cetera.

Following them, but we have.

<unk> sized our A&P spending.

Making sure that it is against the businesses with higher margins and where it makes the most sense.

Got it thanks, and then just on the cost savings.

If I remember correctly, Amit supposed to help out quite a bit in fiscal 'twenty three so just thinking through.

How if at all.

The ability to extract savings from all the changes.

Given given perhaps a little bit of a change in terms of expectations for 'twenty three.

Yes, I don't think I think if anything on the savings from Ahmed we're seeing more opportunity today than we saw when we started the project and.

And for a variety of reasons.

As we've gotten into the project and modeled or transportation.

As we've shifted the company from collect freight to prepaid freight.

As we do.

<unk> diversified our port exposure.

We now have a lot more levers to pull to navigate.

The external environment. When we started off at transportation costs were lower than where they are today, even though today transportation costs are starting to get a little better from peak levels, they're still well above.

Where we were when we started off at and if you recall Amit was in part about reducing the miles driven.

<unk>, our business to be have more port diversification better service for our retail customers and take 40% of the miles driven out.

And the benefits in terms of transportation savings from that.

Remained higher than when we first initiated the project.

Understood. Thanks.

Thank you our next question.

And our next question coming from the line of Laura.

Laura Lieberman with Barclays. Your line is open.

Great. Thanks, good morning.

With Great you gave a little bit of kind of guard rails are thinking around around 'twenty three but one of my question is that as you work through excess inventory.

Should we think about the negative operating leverage that comes out of that because I know you talked about both bounce back in operating cash flow.

And expectation to recover gross margin so.

Yes.

I'll start with that if you can help us how do we think about the negative operating leverage that occurs with working through excess inventory.

Yes, good good good point Lauren.

And Youre right.

<unk>, we're working through excess inventory by pulling back on the supply plan.

We've pulled back on the supply plan pretty aggressively across the whole portfolio. The self manufactured businesses, where we have the majority of the fixed cost deleveraging impact we can pull back on the supply plan with about three months notice.

The.

Sourced businesses take about eight months of notice so those are tougher and so a lot of the.

We may have a little bit of a negative impact next year on on fixed cost deleveraging, but.

But I don't think thats going to be.

A material driver.

Because of the timing of.

<unk> of this pullback in the way it flows through on the source businesses versus the cell manufacturer businesses.

Okay. That's super helpful. So the 100 basis points you specified in the fourth quarter.

We shouldnt give quarterly but I do think cadence is important so something less than that in Q1.

And then as we get into Q2. Additionally, you Shouldnt do you think there shouldnt be a fixed cost absorption.

The fixed cost absorption.

So when you get into Q does.

Is that fair, yes, I think Thats, a fair a fair assumption.

Okay, Great and then my second question was just on the cost cutting productivity overhead all the litany of things that Ravi you ran through on the priorities in this sort of actions you're taking.

You are taking that in.

In the context of how much progress. The company has made in the last couple of years of reinvesting in capabilities.

Thank you rebuilding culture.

How do you manage that that dynamic right that this is we're right back unfortunately to the necessity to make sharp pullback.

<unk> been reinvesting to create a better platform. So.

And I just love to hear some color on how you are looking to manage that.

From an aggregate corporate standpoint thanks.

Yes, I think thats a brilliant question.

So it is definitely.

Have to make choices.

I think.

<unk> for the very reason you mentioned it gives us the ability to do this in the sense. The culture of the company is in a great place.

Last year the engagement levels have gone from 45% to 75, we just got our engagement results lost tenant two weeks ago. They were against 75, so despite everything.

We're keeping the morale up and the culture. So I think what we want to do is the cost reductions through them very intelligently and not cut muscle.

We're very focused on operating models.

And how we go to market, how we do business.

They're duplication and.

So that we're actually improving how we work.

And there's always been a little tension between.

Centralized functions and to be used and how do you optimize that we've been continually working on that and I think we want to provide even greater clarity on road clarity. So that we don't have duplication international is a place where there is a lot of fragmentation and we've talk.

About that so now that's something we're very heavily focused on.

The first steps we've already taken we just announced.

For the first time in your country General manager for Canada, where all of the B you saw there and we had situations where 44 people in Canada reported a party for people in the U S. And we just think that's a lot of duplication and 71 that cleaned up so that's a one year old approach and so we think that.

There are ways of doing this where are you.

Get very efficient and just like we've done avid in the hole.

Distribution side, we think there are a lot of manufacturing efficiencies from our factory side and looking at Hey, what are the things that we can do there, but the network taking Ahmed moving now to international given the success in the U S. So we still think that there's enough there for us to do.

<unk> to give us a real meaningful reduction in overheads and efficiencies.

And I already mentioned the SKU side without.

Damaging the culture.

And whatever we do we're going to do it very thoughtfully and with a whole people first mentality.

Thank you and I'm showing we have.

For one more question one moment our next question.

And our last question coming from the line of Peter Grom with UBS. Your line is open.

Hey, good morning, I guess good afternoon, I Hope you guys are doing well so.

I just wanted to follow up on the comments you made around in a recessionary environment and preparing for a softer top line.

Year can you maybe just provide some context around that particularly in light of how the topline has progressed this year and into the fourth quarter or is there any way to quantify what a softer top line environment looks like from a core sales perspective would you expect to see a similar rate of decline. We're seeing right now should should things kind of improved because I know a lot of the impact right.

Now it is being driven by retail inventory, destocking, which should improve but it also sounds like you expect.

<unk> can become a much bigger drag from here as well so just any thoughts on how to think about that more broadly at this point in time would be helpful. Thanks sure Peter.

Not to be Q3, we'll quantify that in February .

<unk>.

I'll give you some qualitative views if I could I think.

The thing that we don't want to be it is first and foremost it's almost impossible to quantify right now.

Where the whole categories for B, where the macro would be because.

You just saw that GDP in Q3, it actually was a little surprising for the country that.

Turned out better, but it's a mixed message. So it's very tough our stance on it is more from a timing perspective.

Got it.

Don't hope that that would be a very robust topline instead make sure our.

Laser focus next year to deliver our number one priority.

Get those inventory introduction in cash cash cash that's number one number two gross margin gross margin number three operating margin. That's what we're thinking about and the lesser risk for US is hey, how do you make sure of that and don't get yourselves because during.

Covid, we had that big bump up a trial at 5% growth.

Look at everything that we are going to control, we're going to do extremely well the macro is something we don't control. So we take all of those actions and we will continue to innovate than the top line. If it does better that would just be icing on the cake. We just want to make sure that the organization on the stance that is.

Very important to be efficient and we've got to get those operating margins up and got to get cash flow. That's how we're approaching it so I think.

We'll have another quarter to see where we are where we can guide appropriately but are planning stance is planned for the worst but then you can execute extremely well based on that so thats our status it stopped being conservative it's not we just it's very tough to predict right now.

Okay.

Okay. Thank you all for joining.

Thank you very much.

Thank you, ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

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