Q1 2023 Newell Brands Inc Earnings Call
Speaker 1: And.
Speaker 2: Good morning and welcome to Newell-Brands first quarter 2023 AirNH conference call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. In order to stay within the time schedule for the call, please limit yourself to one question during the Q&A.
Speaker 3: Thank you. Good morning, everyone. Welcome to NREL brand's first quarter earnings call. On the call with me today are Ravi Soligram, our CEO , Chris Peterson, our president, and Mark Ursig, our CFO . Before we begin, I'd like to inform you that during the course of today's call, we'll be making forward-looking statements which involve risks and uncertainties.
Speaker 3: Actual results and outcomes may differ materially, and we undertake no obligation to update forward-looking statements. I refer you to the Questionary Language and Risk Factors available in our earnings release, our Form 10-K , Form 10-Q , and other SEC filings available in our Investor Relations website for further discussion of the factors affecting forward-looking statements.
Speaker 3: Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures and available reconciliation between GAAP and non-GAAP measures are not considered superior to the measures presented in accordance with
Speaker 4: and Mark will take you through our results and our group for the balance of the year.
Speaker 4: This is my last earnings call with Neoprance. As many of you know, in February we announced that I'll be retiring on May 16th, and Chris will take over as the next CEO of the company.
Speaker 4: This is the historic event for us as Chris will be the first internal CEO successor in Newell's recent history, in fact in the last two decades, and it's a testament to a well thought out, well planned succession planning process.
Speaker 4: Over the past several months, I've partnered closely with Chris to ensure a seamless...
Speaker 4: smooth and orderly transition, as well as a successful execution of Project Phoenix.
Speaker 4: I've also spent time in our international markets and I'm encouraged by the long-term opportunities for our key brands.
Speaker 4: I'm confident that Chris, along with the world-class management team we've assembled over the past couple of years, will get us through this difficult environment and take you to the next level. While the macro environment has put considerable pressure on our business, we have a lot of
Speaker 4: I'm optimistic about the future of new brands.
Speaker 4: Over the past several years, we've come together as one Newell, but we are still in the early stages of truly leveraging the scale of the company.
Speaker 4: We have a strong, world-class executive leadership team with great brands that consumers love.
Speaker 4: We're both e-commerce and omnichannel pro-ists. We have excellent customer relationships and are reigniting the processes and passion to drive meaningful innovation.
Speaker 4: Our team has done a superb job on systematically reducing complexity.
Speaker 4: and we're gaining momentum on driving operational excellence through Project AVID and automation.
Speaker 4: Our talented employees are our number one asset, and we are grateful for their continued efforts, resilience, and dedication, as well as their support and execution of the change agenda we have implemented as part of Project Phoenix.
Speaker 4: Phoenix is not just about efficiency, then cost savings.
Speaker 4: It is truly a new operating model. I'd like to thank our employees for their trust in me and thank their entire leadership team.
Speaker 4: It has been a distinct honor and privilege to lead the company over the last several years. I'm confident that our best days are truly ahead of us.
Speaker 4: Onwards and upwards, and I now turn over to Chris.
Speaker 5: Thank you, Robbie, and good morning, everyone. First quarter results were largely in line with our expectations. As anticipated, this was a very difficult period for the company, with top and bottom line under significant pressure. The headwinds knew we'll face in the back half of 2022 from normalizing category trends around the world.
Speaker 5: constrained consumer spending and discretionary categories, retailer de-stocking, fixed cost deleveraging, inflation, and foreign exchange persisted into Q1. However, there were several bright spots, including stronger cash flow performance relative to last year.
Speaker 5: During Q1, we also continued to build operational excellence across the organization and made meaningful progress operationalizing the distribution and transportation benefits associated with Project OVID and implementing Project Phoenix.
Speaker 5: Let me provide additional perspective on both initiatives. As you may recall, on February 1st, we implemented the second go-live wave of Project OVID across the remaining food categories as well as the writing, outdoor and recreation, and commercial businesses.
Speaker 5: The conversion has been very successful and our distribution and transportation organization is now fully centralized. We're currently operating in the new go-to-market model utilizing both East Coast and West Coast ports via a nationwide multi-node network of mixed distribution centers.
Speaker 5: including the two new DCs we stood up in Pennsylvania and North Carolina.
Speaker 5: While it's still in the early days, we are beginning to realize benefits from the new model, and in the first quarter we meaningfully improved fill rates relative to last year, reduced delivery times, and have a clear line of sight to cost efficiencies.
Speaker 5: The first quarter represented a crucial period in the implementation of Project Phoenix, which is expected to simplify and strengthen the organization by leveraging our scale to further reduce complexity, streamline our operating model, drive operational efficiencies, and unlock significant savings. Although there is certainly a lot more work ahead of us.
Speaker 5: we made progress on key pillars of Project Phoenix during the first quarter.
Speaker 5: First, we transitioned the company into the new operating model organized into three segments, Home and Commercial Solutions, Learning and Development, and Outdoor and Recreation.
Speaker 5: scale of the organization, unlock new opportunities for growth, while enhancing mobility for our talented employees. Second, we move to a one-rule sales model for our top four customers to harness the scale of our portfolio while building win-win and enduring partnerships with our top customers. We are bringing a unified approach to selling our products to our major customers.
Speaker 5: drive incremental distribution gains, and improve our agility.
Speaker 5: We moved to a one-door go-to-market approach in Canada.
Speaker 5: last year and in January of this year we did the same in Latin America, Australia, New Zealand and Japan.
Speaker 5: We expect to complete EMEA and all other markets by the end of this year. Fourth, we have centralized manufacturing in the Newell's Supply Chain Center of Excellence. We are excited about the opportunity to turn the company's manufacturing scale into a competitive advantage and to optimize our global manufacturing network.
Speaker 5: We continue to believe that a unified global supply chain organization will drive significant cost and service efficiencies, improve our supply chain resiliency, further enhance the company's technical capabilities, strengthen our culture of customer connection and collaboration, and position us to become a best in class.
Speaker 5: scaled general merchandise supplier to our retail partners.
Speaker 5: As we continue to tightly manage costs and assess all aspects of our spend, we are also analyzing our real estate footprint, particularly given the shift towards the hybrid work environment. We closed three offices during the first quarter and expect additional office closures throughout the upcoming years.
Speaker 5: We are on track to achieve the planned headcount reduction associated with Project Phoenix, along with the annualized pre-tax savings in the $220 to $250 million range when fully implemented. For more information, visit www.fema.gov
Speaker 5: Careful planning and consideration have gone into every decision relating to our employees, with communication to the impacted individuals either already complete or in process depending on the market.
Speaker 5: The past several months have confirmed our cautious stance on the macro environment and the consumer for the balance of this year, particularly as it relates to discretionary spending. Our views are predicated upon macro indicators such as slowing retail sales, rising household debt.
Speaker 5: and persistently high, although moderating inflation on essentials such as food, energy, and housing.
Speaker 5: We expect these factors, along with the rollback in government stimulus spending, to restrict the share of consumers' wallets that's directed toward discretionary purchases.
Speaker 5: Elevated prices on everyday goods are not only weighing on consumption in the US, but we're observing similar trends in international markets, particularly Europe .
Speaker 5: We are seeing continued normalization and demand across home-based categories that benefited from stay-at-home trends during the pandemic.
Speaker 5: Given the longer purchase cycle for many of these products, we expect this behavior to persist through the year.
Speaker 5: Retailers have continued to pull back on general merchandise inventory levels and we expect this behavior to persist in the near term. Also, as you may have seen earlier this week, one of our customers, FedBath and Beyond, filed for bankruptcy protection and indicated they may pursue a double path of potentially selling off their assets.
Speaker 5: While we typically do not comment on individual retailers, given they were an important customer for Newell Brands in 2022, I'll shed some light on where we stand. They accounted for less than 2% of Newell's sales in 2022.
Speaker 5: Given their situation, we took steps last year to largely eliminate our credit exposure.
Speaker 5: While we have minimal risk on the receivables front due to the proactive actions we've taken, we do expect this to be a slight headwind for Newell as they liquidate inventory and shoppers migrate to other retailers.
Speaker 5: While there's a fair amount of uncertainty surrounding the macro backdrop, with Q1 results largely in line with our expectations, we are reaffirming our outlook for 2023, although we now expect the company to be toward the lower end of the guidance range.
Speaker 5: We continue to expect this to be a challenging year for the company and remain committed to stabilizing Newell's financial performance while driving foundational improvement. Our ultimate goal is to return the company to sustainable and profitable growth as macros improve.
We are laser focused on delivering against the five priorities we laid out on last earnings call. First, strengthening Newell's cash flow and balance sheet by continuing to right size inventories, carefully managing the forecasting process, and staying close to the evolving consumer and customer trends.
Second, driving gross margin improvement by accelerating fuel productivity savings, further advancing our automation initiatives, operationalizing project audit distribution and transportation benefits and pricing for currency and inflation.
Third, driving overhead savings through Project Phoenix and tight spending controls to offset the impact of incentive compensation reset to more normal levels and wage inflation.
Fourth, continuing skew count reduction progress along with other simplification initiatives. And fifth, operationalizing the new company structure to enable faster transformation progress. As Ravi mentioned, over the past several months, he and I have partnered closely to ensure a smooth transition in mid-May. At the same time, I along with the rest of the leadership team have embarked upon a refresh of our strategy....
of the capital allocation priorities required to support the new strategy.
We are on track to complete this work and share our thoughts in the next few months.
While we continue to face a very challenging macroeconomic environment, I am confident that our portfolio of leading consumer brands and talented employees will allow us to further strengthen the company in the years ahead as we sharpen our strategy, optimize our cost structure, and fully leverage the scale of the company.
Before turning over to Mark, on behalf of our entire organization, I would like to wish Robbie well in his retirement and thank him for his leadership, partnership, and dedication over the past several years. I'll now hand the call over to Mark. Thanks, Chris. Good morning, everyone. Let's jump straight into our Q1 results, which were largely consistent with going in expectations, but core sales and normalized earnings per share both landing within guidance, albeit at the lower end of the range.
Net sales contracted 24% year over year to $1.8 billion, reflecting an 18% decline in core sales, a 2% headwind from currency, and a 4% impact from the divestiture of the CH&S business and certain category exits.
While we are clearly not happy with an 18% decline in core sales, it does bear mentioning that this was against a particularly difficult base period comparison, since core sales grew 6.9% in Q1 of 2022 and 20.9% during Q1 of 2021. Therefore, on a stacked basis, core sales were up versus 2019 levels.
top line, along with inflation, including carryover inflation costs from last year, were the largest drivers of margin pressure in Q1. These factors more than offset the favorable impact from pricing, Project Phoenix, and our fuel productivity efforts, which are tracking slightly
Net interest expense rose $9 million versus last year to $68 million, primarily due to increases in debt and interest rates, and the normalized tax benefit was $1 million, all of which netted out to a normalized diluted loss of 6 cents per share for the quarter.
From a cash flow standpoint, operating cash was a use of $77 million during the quarter, which while still negative was an improvement of nearly $200 million versus last year.
Inventory was a big part of the improvement, coming in $150 million lower than a year ago.
This suggests two things. First, we are doing a better job of matching raw material and source finished good orders and internal manufacturing production to actual customer order patterns. Second, the significant inventory reduction we are expecting and counting on over the balance of the year is already working its way through the system.
The company's leverage ratio was 5.7 times at the end of Q1, and we don't expect it to be below five times until the end of the year. Anticipating this, last month we secured a temporary reduction in the interest coverage ratio and our revolving credit agreement to three times from 3.5 times for the next four quarters. This amendment, we believe, provides the company with sufficient flexibility to navigate...
to remain under significant pressure in Q2 due to the same headwind that weighed on Q1, as well as unfavorable mix due to a shift in some writing orders from Q2 to Q3 related to back to school activity.
Taking all this into account, we are forecasting Q2 normalized operating margin of 6.5 to 8%.
We expect a step up in interest expense and a high teens tax rate, so normalized earnings per share are forecasted to be 10 to 18 cents.
For the full year, we are reaffirming our 2023 outlook with net sales of $8.4 to $8.6 billion, driven by a core sales decline of 6 to 8 percent, and a nearly 3 percent headwind from currency, divestiture of the CH&S business, and certain category exits.
Normalized operating margin is expected to be 9.6% to 10.1% or flaccid down 50 basis points versus last year, as gross margin improvement is more than offset by overheads despite $140 million to $160 million of anticipated pre-tax savings from Project Phoenix in 2023. For 2023, we are reiterating our normalized earnings per share guidance range.
We continue to expect significant year-over-year improvement in operating cash flow, driven primarily by reduction in working capital. Specifically, we anticipate $700 to $900 million operating cash flow, inclusive of $95 to $120 million of cash payments related to Project Phoenix.
At the midpoint of our range, free cash flow productivity is comfortably above 100%. With Q1 actuals now in hand, along with our Q2 and full year guidance, it becomes self-evident that we are expecting a much stronger top and bottom line during the back half of the year versus the front half. Given this reality, we thought it would be helpful to provide some specific reasons why we believe our business results are not going to be the same.
slow down.
Second, as it relates to our own underlying business dynamics, our second half, historically, with the exception of last year when significant e-stocking began to manifest itself during the third quarter, has represented more than half of total company sales, which will help with fixed cost absorption, and as I'm sure you're all aware, starting with the third quarter, our base period comps get much easier.
In addition, based on back to school order patterns, we now expect about a point of sale to move from Q2 to Q3 this year, which is one of the reasons why our back half mix should be more favorable. Third, we have several corporate driven initiatives already in flight which we believe will disproportionately benefit the second half of the year. For example, we are on track to have our biggest productivity year ever on two fronts.
First, as it relates to gross margin, where we are on pace to save over 4% of COGS due to our fuel initiative, with the savings being slightly back half weighted.
Second, Project Phoenix, which Chris has already commented on, should understandably have a bigger positive impact on overheads during the second half of the year.
Finally, we just completed an in-depth analysis of our domestic business at a SKU level. Our extensive analysis clearly showed that additional pricing is required to mitigate the impact of continuing inflation on some categories and to fix the underlying structural economics on products that are because of the unprecedented level of inflation we have sustained in recent years.
not generating an appropriate level of return on a fully loaded basis. We believe it's imperative that we address these issues now, so they don't perpetuate or get worse. Thus, we are now expecting to take an incremental US pricing action across roughly 30 percent of our US business, largely concentrated in the home and commercial solutions segment in the third quarter.
After this intervention, we will not be able to invest in the consumer understanding, brand building and innovation capabilities our consumers and retail partners expect.
So based on these reconciling factors, we believe our guidance, including the associated front and back half splits, is appropriate and reasonable and reflects progress on our multi-year journey to create meaningful levels of sustainable shareholder value going forward.
Operator, if you could, please open the call to questions. Yes, sir. Ladies and gentlemen, at this time, if you have a question or comment at this time, please press star 1 1 on your telephone keypad.
As a reminder, in order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session.
As a reminder, in order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. Please stand by while we compile the Q&A roster.
Our first question or comment comes from the line of Peter Grom from UBS. Your line is open, sir. Hey, thanks, operator, and good morning, everyone. So, Chris, I guess I just wanted to get your perspective on just kind of underlying category growth, but more in the context of really what's changed since we last spoke in February .
go into recession, is that outlook still feasible?
Yeah, sure. Thanks Peter. Good morning. From a consumer and sort of macro environment, as I mentioned in the prepared remarks, really what we're seeing is continued pressure on the consumer in discretionary and durable categories. And that's
a function of inflation on food, housing, and energy, causing the consumer to prioritize more essential items and deprioritize spending on durable and discretionary categories. Coupled with that, many of our categories have longer purchase cycles.
And when stimulus money came into the market a year or two ago, in a big way, a lot of consumers bought product categories that effectively took them out of the market for a period of time. And so I don't think there's a meaningful change on that fundamental dynamic, which is why we're maintaining the range for the year.
I will say that we've gotten, I guess in terms of what's changed in the last two months since we talked, specifically, we did come in at the lower end of our guidance range, minus 18 on core sales growth. That was really driven by outdoor and recreation, which got off to a slower than expected start to the season.
primarily due to wet and cold weather in the western part of the country. We've seen, as I mentioned in the prepared remarks, one of our major retailers declare bankruptcy. That we do expect to have a temporary sort of disruption in the market. We expected that on the year.
but the timing was not certain. And then from a retailer, the stocking standpoint, I think, you know, in our first quarter results, probably of the minus 18% core sales growth that we reported, about half of that was from the market.
was underlying sort of consumer dynamics, and the other half of that was really retailer de-stocking, roughly. And so that's part of the reason why we think that retailer de-stocking worked largely through, although we do expect it to continue to have an impact on Q2, but we think by the time we get to.
sort of mid year, you know, that will largely be behind us. No, that's that's the problem. So just the.
Just to clarify that last point, so around had roughly half of the minus 18 was related to retail, the stocking and roughly half was just kind of. What you're seeing in terms of underlying demand.
That's right. And that underlying demand, I would say, is a result of the base period, it's a result of the pressure on consumer wallets and normalization of some of the categories from COVID peak levels, but that's accurate.
Great, thanks so much Chris, I'll pass it on. Thank you. Your next question or comment comes from the line of Kevin Grundy from Jefferies. Mr Grundy your line is open.
Great, thanks so much Chris. I'll pass it on. Thank you, your next question or comment comes from the line of Kevin Grundy from Jeffries. Mr Grundy, your line is open. Great, can you guys hear me OK?
There we go. Okay. Morning, Kevin cut off. Hey, good morning guys. Sorry about that. My line kind of went dead for a moment. I'd like to pivot to cash flow. So better versus versus last year. One Q is of course, sort of a seasonally light quarter and typically tends to be a cash use for the company.
So a few questions, all pertinent. Number one, how did cashflow come in relative to your expectations for the quarter? Number two, what's kind of the visibility or the level of confidence you have on the 700 to 900 million? I think the comment was around guidance broadly, it's appropriate and reasonable. I'd sort of push a little bit and say, is it conservative?
And then lastly, and certainly importantly, given where the dividend yield is, maybe just some updated thoughts on ability to fund it. And I think when you kind of look at the guidance a little bit and look at where CapEx could be, if you kind of come in at the low end of the range, you're kind of right there. There's not a lot of wiggle room to fund the dividends. I think that in understanding it's a Board decision, I think some of your updated thoughts there would be appreciated. So thank you.
part of it was better working capital performance. That was about $400 million better. Almost all that was driven by inventory. We did have a lower incentive comp payment, cash payment for incentive comp for management. That was about $100 million. Lower operating income was probably a $200 billion differential negatively year over year. And then we had several items that combined for another $100 downturn, which was the Phoenix restructuring, the Brazil tax payment.
and some higher cash interest. So if you do that bridge, you'll find yourself comfortably at that 200, which was the improvement that we saw. If you think about the full year, again, it's going to be a story of basically working capital improvement, because if you look at the operating cash flow from the prior period, it was down roughly 300. If you take the midpoint of our 700 to 900 million range, that puts you at 8. So we're basically looking at a bridge of about 1.1 billion of improvement.
we're expecting another four to five hundred million to come out of inventory throughout the course of the year. Our inventory performance in Q1 exceeded our expectations, and as you heard in my prepared remarks, the in-transit inventory is already 250 million down versus the prior period. So we feel pretty good about the operating cash flow elements. We're watching you very closely, but we have high degree of confidence in it.
Yeah, and Kevin to your, maybe I'll just take the question on the on the dividend to your to your point, the operating cash flow range, which we kept unchanged at 7 to 900 on operating cash flow. Is sufficient to find the current year capex and the dividend.
and have a small amount of debt pay down. That being said, as I mentioned in my prepared remarks, we are taking as part of the strategy refresh, we are going to look at the capital allocation strategy for the company going forward. And certainly the dividend is going to be part of that capital allocation strategy.
Bye.
Thank you.
Your next question or comment comes from the line of Chris Carey from Wells Fargo. Mr. Carey, your line is open. Hi, good morning.
from the line of Chris Carey from Wells Fargo. Mr. Carey, your line is open. Hi, good morning. Morning Chris.
Just from a gross margin standpoint, right, a little bit of a step up sequentially, but obviously still under a lot of pressure. You know, you're looking at taking pricing in the back half of the year now, which should give a little bit of a lift. Can you just clarify, you know, how you expect the gross margin to trend sequentially and then just on the new pricing, you know, I'm sorry if I missed it, but.
you know, how are you factoring the macro backdrop? So, you know, if the consumer starts to get weaker, do you still go through with the program? Are you gonna need to offset it with any incremental promotions if that environment seems to play out from a macro standpoint? So just, you know, how are you thinking about sensitivity of this new pricing plan that you have back half the year? So thanks on the gross margins and the pricing.
Yeah, so let me help you on the gross margin and I'll even help you on the operating margin line as well because obviously the two are highly correlated. You know, it's not lost on us that the guidance that we're providing is kind of a tale of two halves. And if you look at the operating margin in the first half, we're calling for it to be mid single digits and then for the back half, we're calling for the operating margin to be in the low teens. And that obviously implies a big reversal from the first half of the second and both margin and gross margin.
But if you look at all the elements that we have in flight, I think you'll see that the splits we have are reflective of what we're seeing on the underlying trends of the business itself. So, for example, if you look at Phoenix. If you look at the fuel productivity initiatives, and if you look at the net pricing that we discussed, roughly 60% of the benefit that comes from those 3 programs.
will fall into the second half of the year. Similarly, if you look at inflation in FX, roughly 70% of the hertz from those two things falls in the first half. And then, of course, you have to look at the comps on the base periods. In the first half, we're going up against plus four in the prior periods. In the second half, we're going against minus tens. So obviously that's a big factor as well. From a trade-dee stocking standpoint, we think, you know,
Most of our large customers are at their target weeks of coverage now. We think there might be a little bit more that kind of comes out through the second quarter. But at that point, we think we're in pretty good regard as it relates to that. We talked about normal business seasonality where the second half historically has been just a larger dollarized value than the first half. And we talked about the shift that we've seen back to school from Q2 to Q3. And then finally, I guess I'd offer that in Q1, we did have some additional E&O charges.
as we work down our inventory levels. And that actually costs us a couple pennies on the quarter. So, if you really look at the underlying pieces that, you know, drive the first half, second half splits on gross margin as well as operating margin, we think they're reasonable and appropriate.
And on the pricing piece, I know Chris wanted to add a few thoughts on that. Yeah, on the pricing piece, one of the things that we did, and actually when Mark came in, we initiated this work, was because we've been able to reduce the company's SKU count from 102,000 when we started the SKU count reduction effort at the end of 2018, to 20,000 when we started the SKU count reduction effort at the end of 2018.
that were structurally challenged and where we hadn't fully priced for inflation. And so we are announcing pricing in the US that will be effective in the third quarter. It's largely, it's on about 30% of our US business as Mark mentioned.
It will be effective in the third quarter. And where we're taking the pricing, it's going to be sort of a range between high single digit and low double digit percentages. And we think it's appropriate and warranted.
because we haven't fully priced for inflation on these SKUs. I'll also mention that this is a good example of simplification helping us because if we had tried to look at the profitability by SKU three years ago, it would have been virtually impossible for us to do it because of the number of SKUs that we have.
We're now getting much better visibility at a much more granular level that's allowing us to go after this. So we think it's warranted. We think that it's the right thing to do for the long term health of the business. Of course, we're going to monitor the trends carefully.
as the pricing gets put into the market with regard to the consumer response. And broadly speaking, in our guidance, we have not assumed that the pricing adds to the top line in the back half. We've largely assumed that the price is going to be higher than the price of the stock.
The pricing is is offset with with volume loss. And so this is more about improving the structural economics of this business than it is about driving short term top line growth. Thanks for all the perspective.
Thank you. Your next question or comment comes from the line of Andrea to share from JP Morgan. Mr. share your line is open.
Thank you very much and good morning. Can you comment on what are you hearing on the back to school? I guess you mentioned, Mark, you mentioned that it seems like normalize, you're seeing normalized inventory levels and Chris, you said the same with the retailers, but I'm just thinking in terms of the timing of shipments as well, because I think it moved, I just had the last year.
As we think about what's embedded in your guide in terms of the resin, I understand that you don't buy the resin directly, but you will eventually get the benefit from that as you lap a couple of months of, in this case, in the case of resin, is a substantial decline more than a year ago. So I was wondering if...
you're starting to see that benefit and that's embedded in your guide and if that anything has changed to better words since you got the last. Thank you. Very good. All right. Thanks Andrea, and I'll try to hit the business unit questions and then maybe give let Mark hit the resin question. On the writing business and back to school, we feel very good in the first quarter.
writing was effectively flat from a core sales standpoint. So despite the company being down 18% in Q1, writing was not down. And that's important because writing is our most profitable business. And writing being flat in Q1 means that we're meaningfully up.
versus the 2019 base period because we have built market share during that period from 2019 until today. As we head into back to school, we're just in the sell-in period. As you know, we don't really get a read on the consumption of back to school.
until kind of the July August September period but I will say from a sell-in perspective Retailers are planning for a pretty normal back-to-school year I think in general people are expecting back to school to be relatively consistent with last year's back to school
We feel very good about our plan heading into the back to school period, because if you recall last year, we had a little bit of.
supply challenge on some sub-segments of our business. This year we do not have that challenge and we are fully available from a supply standpoint and recovered. We also already have visibility to the vast majority of the back to school seasonal orders and we feel very good about our in-store.
Display positioning in the marketplace with the leading retailers and so we are, we are optimistic as we head into the season. Final thing I'll say I'm back to school and this is true for a lot of the seasonal businesses that we're seeing in our business is that. Because the supply chain has improved so rapidly.
Retailers are now not ordering seasonal inventory as early as they did in the past. So last year, for example, if retailers wanted back to school inventory in February , March, April to try to secure inventory for the season.
This year we're seeing retailers say, no, we want it later in the season because we don't need it that early. And so that's why we mentioned in the prepared remarks, we expect the shipments of back to school to go back to more normalized levels. And much of the shipments to occur in May, June , July . And so that's true on the back to school business. It's also true on the other.
The outdoor and rec was down from a core sales growth standpoint in the high 20s in the first quarter. So significantly below the company average of down 18%. And that largely is due to a comping of a very high base period but also due to a slow start to the season because of the weather.
kind of May through July is sort of the big season. And so what we're seeing so far is retailers saying, hey, because of the slow weather, can you hold up the shipments in because we don't need the inventory quite as fast, but too early to declare how the season overall will wind up.
And then as it relates to your question on resin, resin has been a help for us since the third quarter of last year and we expect it to remain so for all of 23. When we think about COGS inflation in totality, you know, we expect it to be low single digit for 23 versus what was high single digit in 22.
your question on Resin. Resin has been a help for us since the third quarter of last year and we expect it to remain so for all of 23. When we think about COGS inflation in totality, you know, we expect it to be low single digit for 23 versus what was high single digit in 22. Super helpful, thank you.
Good morning. On the gross margin side, thank you for some of the call you guys gave. Sorry if I missed this, but you understandably left the guidance unchanged, but mentioned some fuel savings from Phoenix. You talked more about your freight assumptions and how those have changed over the course of the past few months.
kind of how do you see it evolving over the next 12 to 18 months? Yeah, we are seeing a noticeable drop in transportation cost and it's really driven by a couple of things. And so I'll parse it into sort of three parts. First is the ocean freight market for inbound freight has dropped dramatically back to close to pre-pandemic levels. And I think as I've talked before, the contract years for ocean freight go May 1st to May 1st and we're seeing.
We've now concluded the negotiations for this upcoming contract year and we're seeing ocean container costs back close to pre-pandemic levels, which is a noticeable retreat from where they were last year and the year before. So that is a big positive. The second part of this is trucking costs in the US and what we're seeing there...
is full truckload cost is coming down significantly as diesel fuel costs are coming down, as well as demand for full truckload capacity is coming down in the U.S. market. And so that's another sort of tailwind. Interestingly, we're not seeing the same thing on...
less than truckload freight, which is remaining sort of stubbornly high. The third impact that's driving our transportation costs down is the OVID implementation. And so as we've implemented OVID and gone to the mixed distribution centers, we've gone
We are seeing a meaningful opportunity for us to move from less than truckload shipments to full truckload shipments. It takes work to operationalize that, but we're making very good progress with some of our top retailers at driving big shifts from less than truckload into full truckload. And for perspective,
full truckload costs about half the amount for a similar volume versus less than truckload. So if we can convert the business from less than truckload to full truckload for the portion of the business we convert, transportation cost goes down by 50% through that effort.
And so that's sort of where we are on transportation costs broadly. And then you mentioned the fuel productivity program. I just wanted to offer a few additional thoughts on that because it's been one of the areas that's really impressed me when I've been joining up here at Newell Brands. If you look back at 2019 and 2020 as an example, we spent $250 million averagely on CapEx during those two years.
And in those two years, we spent a little less than 20% of our capital on productivity projects. If you look at 21 and 22's capital program, which was roughly $300 million, over 40% of our capital was spent on productivity projects. So the FUEL program has really started to ramp up. You're seeing that through increased automation. And the move that we made as part of the project...
effectively across the entire neural network and if you look at the 4 billion of direct and source finished goods, you know, only 60% of that right now is single source, right? So 60% single source, 25% dual source, and about 15% is dual qualified. So we have a tremendous opportunity going forward and we only see the fuel productivity savings just increasing over time as we sit here today.
Awesome. Thank you guys very much. Thank you. Your next question comes from the line of. Filippo for Lorna from city. Mr. For Lorna, your line is open. Everyone.
Just a quick follow-up on pricing. What has been the reaction from your retail partner to your additional price increases? Have you also seen your competitors take prices up or are you assuming they are going to take prices up? That's the first question. In the longer-term, can someone take sales for them and then fail them down?
Just in general, can you give us some sense on the path to operating margin recovery to the Me Too High teens? Clearly, you're doing a lot of progress on the cost savings front, but the external environment is essentially removing a lot of those benefits. So let's not miss that.
What do you think is the path to get to those targets? Is your timeline delayed because of the macro environment? Can you give us some sense on the timing there? Thank you.
Okay, let me start with the pricing. We are just, we've just announced, or just announcing the pricing as we sit here today in the US so it's too early to give a full view of the retailer reaction. What I will say is that the pricing that we're putting in place effectively today.
which is about 30% of our US portfolio that we're pricing on, is cost justified, it is on the part of the business where we haven't fully priced for inflation. And in the past, as we put pricing in over the last several years, we've generally seen competition largely follow the pricing that we put in.
Of course, we don't know what they're going to do on this one. And the reason that we believe that the competition has largely followed is because they're seeing the same inflation cost pressure as we are. Frankly, we've been focused on not overpricing given the macro environment from a consumer standpoint because we wanted to offer the consumer great value. And we're encouraged that we're not needing to take pricing on 70 percent of the U.S.
As always, work with our retailers.
on implementation of this, but I think the retail environment in general has been relatively receptive when you have a cost-based story to accepting pricing as you've seen from many of the other consumer product company reports that have come out over the past week or so. From a longer term perspective on operating margin,
We continue to believe that we've got a significant opportunity to improve the operating margin of this company. And we think that the opportunity is largely gross margin-based, which is why we've got the fuel productivity savings going, why we've got the Ovid initiative going.
the automation initiative, and we're attempting to drive gross margin accretive innovation to help us mix up.
We also think we've got continued opportunity on overhead to simplify the company, to drive productivity across the company. It is being masked somewhat in the short term because of the top line pressure, but our guidance implies a pretty significant bounce back in the back half of the year as Mark went through.
Great, thank you. Very helpful.
Thank you. Your next question comes from the line of Olivia Tong from Raymond James. Ms. Tong, your line is now open.
in terms of more premium or more value to your products. And then as you think about
I know you mentioned that these are cost justified, but what happens if others don't follow? How comfortable are you with wider price gaps as you try to resolve the profitability? And then I'll follow up. Thank you. Yeah. You know, we can't get into the specifics given the breadth of
of the pricing, but as Mark mentioned in the prepared remarks, it's largely focused in the home and commercial segment. And so it is where the majority of this analysis showed that we hadn't fully priced for inflation and in some cases, because of that, we've got structural profitability.
effect and so we've been scraped by competitors and so in the short term this may put some market share at risk if we're trying to go out and take a price increase and competition follows us at some period in the future of course we don't know what they're going to do we're going to watch that
The reason why we feel like this is the right thing to do is even if competition doesn't follow us, because this pricing is geared toward products that are relatively structurally challenged, not all of the pricing, but a significant part of it.
Even if we do have volume loss, it doesn't really cost us that much from a profitability standpoint, if you will. So that's why we're convinced it's the right thing to do. And we'll report out as we go along here.
Great, thanks. And my follow-up is just, I know we're only one quarter into fiscal 23, but as you think about sort of exit rate and your second half growth implications, should we expect a similar run rate at the beginning of first half fiscal 24? I mean, I know the business seasonality is going to flip, but if these fasten will be in the base, the back to school timing base is clean, commodities get better, pricing is in place, I would imagine that first half of 24 should look...
the growth rate should look pretty compelling.
We appreciate the question we do, but we don't think it's appropriate for us to comment on anything related to fiscal 24 at this time.
Thank you. Our final question comes from the line of Lauren Lieberman from Barclays. Miss Lieberman, your line is now open. Thanks. So I know you've touched a bunch of times on the price increases coming in the third quarter but my question was actually more about...
the kind of skew by skew analysis and kind of thinking about structural economics across the business. I was curious how much of the gaps that you're kind of seeing or other spots maybe where you're not taking pricing, but that things sort of revealed themselves to you in that work that suggested there's kind of structural dynamics to be explored.
to use your own words, to free up capacity for reinvesting, for having a stronger and more consistent innovation pipeline. But this notion of looking at structural economics across the business, I found to be really interesting. And if there are things in play that aren't just about straight pricing that help get it that, maybe by a skew-by-skew basis. Thanks..
Yeah, Lauren, we are have the same excitement that is in your question from this work, because I think one of the things that we've that we've been building and as we've been simplifying is a much stronger analytical capability to dissect the business on many different metrics.
And that capability, coupled with the complexity reduction, is what has sort of revealed this opportunity, which the company really wouldn't have been able to do a few years ago. To the question of, you know, well, are there other opportunities? I think the answer is going to be yes.
of that refresh, we're going relatively deep on all of the different capabilities that are required to win in this industry and how we stack up versus competition. We're also using this analytics to take a fresh look at the where to play choices and the how to win choices for the company.
And then what we need to do from a sort of culture, talent standpoint to enable the execution of that strategy. So I think we're pretty excited about that work. We're not through it yet, which is why we're not sharing it here today.
But I do think we're going to be in a position to share that in the next few months. And it's very much based on that sort of more detailed analytic look at how the business really breaks out across a whole variety of different vectors.
The only other thing I'd add is, you know, we looked at almost 6,000 SKUs in the US as part of this work. We are replicating that same analysis for Latin America, for EMEA. We've been building out customer P&Ls, brand P&Ls. We've been doing four wall plant cost analyses. I mean, the analytical capabilities are really ramping up, and we think it's going to provide us with tremendous opportunities in the future.
Okay, great. Thanks so much. It's a good place to end the call, I think. Thank you. Yes, yes, it is. Thank you. Thanks, everybody, for joining, and we'll look forward to talking to you again soon. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. A replay of today's call will be available later today on the company's website at ir.newelbrands.com.
You may now disconnect. Have a great day.
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