Q2 2023 Newell Brands Inc Earnings Call

July 28, 2023

Okay.

Yeah.

Good morning, and welcome to Newell brands second quarter 2023 earnings conference call at this time, all participants on a listen only mode.

After a brief discussion by management, we will open up the call for your 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 call is being recorded.

I like web cast of this call is available at IR Dot Newell brands' Dot com.

Now I'll turn the call over to Sophie S. Chinas, Vice President of Investor Relations. Mr. Ennis you may begin.

Thank you good morning, everyone and welcome to L brands second quarter earnings call on the call with me today are Chris Peterson, our president and CEO and Mark Erceg, our CFO before we begin I'd like to inform you that during the course of today's call, we'll be making forward looking statements, which involve risks and uncertainties actual results an hour.

<unk> may differ materially and we undertake 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 forms 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 those who are referred 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.

Clinicians at these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables that were furnished to the efficacy.

And now turn the call over to Chris.

Thank you Sophie and good morning, everyone and welcome to our second quarter call.

Second quarter results were in line with or ahead of our projections on all key metrics as expected topline results were pressured by normalizing category trends constrained consumer spending on discretionary products and retailer inventory destocking.

Operating margins earnings per share and cash flow were all well ahead of expectations as we made meaningful progress on productivity initiatives and working capital reduction.

While our results met or exceeded our expectations for the quarter on an absolute basis, we aspire for significant improvement going forward.

That is why we recently created and deployed a new corporate strategy based on a comprehensive companywide capability assessment with an integrated set of where to play and how to win choices. We're very excited about the clarity of this work is bringing to the business and the value creation opportunity ahead of us, but we also recognize that the path forward.

Will not be a straight line.

During our first quarter earnings call, we laid out five key priorities for fiscal 2023, which are all progressing nicely. Let me say just a few words regarding each of them.

First starting with operating cash flow year to date, we have driven a year over year improvement of over $700 million.

Largely by right sizing, our inventory levels to improve forecasting and supply planning processes.

Second gross margin performance improved sequentially behind our ongoing fuel productivity program and project Ovid, which you will recall completely transform Knowles domestic go to market operations. We are on track for a record high year on productivity savings across the supply chain.

Third project Phoenix of simplifying and strengthening the organization by leveraging scale, reducing complexity streamlining the operating model and driving operational efficiencies program is pacing well and is on track to deliver $220 million to $250 million in pre tax savings upon its full implementation.

Fourth our SKU count, which was over 100000 as recently as five years ago is expected to be down to less than 25000 by the end of the year with numerous other complexity reduction actions also underway.

Finally, we have successfully transitioned to and are operating in a new operating model with three segments centralized manufacturing and supply chain and our one oil approach with our top four customers and across most geographies.

It is from this much improved operational and organizational foundation that we've made an important where to play choice to focus on and drive a disparate.

A portion of that amount of our organizational and financial resources to our top 25 brands and our top 10 countries, which each represent about 90% of sales and profits.

Once that decision was made we turned our attention to our how to wind choices, which were fully informed by the capability assessment, we have just completed.

That assessment clearly demonstrated the need for us to significantly improve our abilities and consumer and customer understanding innovation brand building brand communication and retail execution.

Why when we revealed our new strategy in Paris last month, we said, we are making a major pivot in our front end consumer facing capabilities to properly support leading brands in top countries.

Since these how to wind choices are cornerstone elements of the new integrated strategy. We have started to fill talent gaps across key areas and have established clear action plans and kpis for each capability improvement project for.

For example, we are upgrading the company's ability to understand consumer and customer wants and needs and this should enable actionable insights around superior product development, leading to stronger claims in a more impactful and focused innovation pipeline as we concentrate on fewer bigger and longer lasting innovations.

In addition, we recently revamped Knowles innovation process, which will be underpinned by proprietary consumer insights as part of this work, we designed and instituted a project carrying system and implemented an enterprise wide biannual innovation process to sharpen the company's innovation plans drive alignment on the <unk>.

Final and determined prioritization and resource allocation as we identify bigger bets.

We also put in place a centralized tracking system for all new initiatives to enable multi year technology platforms and ensure appropriate financial rigor to drive accretive margins.

Relative to brand building and brand communication, we are building out a comprehensive brand management function, which was not in place previously.

Going forward <unk> brand managers and the multifunctional teams, who support them, we will be responsible for profitably growing our top 25 brands in our top 10 countries alongside a newly redesigned brand communications governance process.

Finally, as it relates to retail execution. Our sales teams are leveraging the portfolio of Newell's, leading brands and scale to actively pursue new distribution opportunities, which they've identified across every business, while also dramatically improving our sales fundamentals and existing accounts.

Although it's still early days I am encouraged by the progress we are making in bringing the integrated set of where to play and how to win strategies to life.

Importantly, these are not just corporate plans they've been formally cascaded throughout the organization and forming the segment functional and regional strategies, where work is ongoing key members of the leadership team and I have visited six of our top 10 countries across Europe , and Latin America in the last two months to ensure we are driving.

The strategy and the execution.

Now before turning the call over to Mark who will discuss our financial results and outlook in detail.

I wanted to address the revisions we have made to our top line estimates for the second half of the year.

First we are incrementally more cautious on the consumption of discretionary products largely due to the resumption of student loan payments in October as payments restart after a multi year moratorium. Many consumers will undoubtedly have to manage their budgets, even tighter given persistently high core inflation, which has lowered real consumer.

Income.

Second several of our major retail customers recently revised their shipping terms on our business moving from what is known as direct import to domestic fulfillment.

We welcome to this move because we expect this change to be a positive for newell longer term. It does put additional one time pressure on back half shipments as their weeks of inventory coverage comes down further as a result of the transition.

Lastly, we are now planning the business the baby business more conservatively in the back half of the year due to the bankruptcy of buy buy baby up until now we assumed in our financial modeling that a buyer would emerge for most of their stores since that is no longer likely we have adjusted our sales forecast accordingly.

Revising our top line outlook and related demand plan now allows us to continue the strong progress we have made on inventory reduction, which is why we are maintaining our operating cash flow guidance for the year.

Additionally, we are taking bold actions to drive stronger productivity in the supply chain, which were made possible by our recent decision to consolidate our supply chain into a centralized organization structure, specifically after benchmarking indirect overhead at each of <unk> key facilities. We are taking a series of discrete site specific actions to <unk>.

<unk> the company's manufacturing Labor force. These decisions are never easy, but we are committed to building a one all optimized global manufacturing network that minimizes total landed cost optimize asset utilization and Leverages <unk> global scale.

Moving forward, we are assessing how to optimize the company's entire plant network as we look to transition to more regionalized multi source plants with upgraded autumn is automation and digitization capabilities.

Where appropriate we will of course share more of the relevant details as plans are finalized.

These topline revisions notwithstanding we remain optimistic on the back to school season, which kicks into full gear in the coming weeks and then we continue to expect much stronger performance for the company in the back half relative to the first half of the year.

The pace of change has accelerated across the company and we are moving with speed and agility to unlock the full potential of the enterprise.

On a personal note I would like to thank Knowles employees for welcoming me as their new CEO <unk> <unk>.

And for their strong endorsement of the new company strategy.

At its core our new strategy focuses on improving the company's consumer facing capabilities, while distorting investments to the most attractive value pools and simultaneously building upon the strengthened operational and organizational foundation, we have built over the past several years.

Their unwavering commitment to our purpose of delighting consumers by lighting up everyday moments inspires me every day.

We have plenty of work ahead, but I sincerely believe we are off to a great start while we continue to navigate through a challenging macroeconomic backdrop in the near term I remain confident in our ability to accelerate the company's financial performance over the long term.

Now hand, the call over to Mark Thanks, Chris Good morning, everyone as Chris indicated earlier, our Q2 results continued to reflect the significant macro driven topline pressures, we've been contending with since the third quarter of last year.

<unk> soft consumer demand as inflation continued to put pressure on discretionary spending and some categories continue to normalize along with trade inventory destocking and the bankruptcy of a major retailer.

Thus, while the 13% contraction in net sales of $2 $2 billion and the 11, 9% decline in core sales might on the surface be discouraging. We believe a more thorough examination showed the interventions we've made to improve the underlying structural economics of the business and strength in operating cash flow are working as intended.

For example, normalized gross margin and operating margin both improved sequentially due to enhanced productivity efforts and project Fenix savings, which were critical in helping mitigate a significant 400 basis points headwind during the quarter from inflation.

Nonetheless, Newell's normalized operating margin contracted 490 basis points versus last year to nine 1% as normalized gross margin declined 320 basis points versus last year to 29, 9% and topline softness resulted in a 160 basis point increase in the normalized SG&A sales ratio.

In addition, during the second quarter net interest expense did increase $21 million to $76 million, reflecting overall higher debt and interest rates versus a year ago, but the decision to right size the dividend in a nearly $700 million year over year reduction in inventory allowed us to lower debt levels versus last quarter by nearly 300 million.

<unk>.

Our effective normalized tax rate of 13, 7% was slightly below a year ago, which when combined with the other elements. We just reviewed brought normalized diluted earnings per share and at 24.

Which was considerably better than the 10% to 18 outlook. We had previously provided.

Turning to operating cash flow the planning team did a great job managing inventory levels down while increasing fill rates, which in North America improved to 94% year to date from 82% last year.

This allowed us to generate $277 million of positive operating cash flow year to date through the second quarter.

Importantly, this stands in Stark contrast to our $450 million use of cash during the same period last year.

Therefore through the first six months of 2023 operating cash flow improved by more than $700 million.

And encouragingly in transit inventory as of June 30 was approximately $275 million below year ago levels. So we are confident inventory levels will be even lower throughout the balance of the year.

The company's leverage increased to six three times at the end of Q2, which was nearly one full turn better than anticipated, we believe leverages peak and expect it to drop to approximately five times by the end of the year, our long term goals agreed leverage at two five times.

As we look towards the balance of the year, Chris laid out the incremental topline pressures we are facing so I will not reiterate them. However, it does bear mentioning that there is additional sales compression coupled with our decision to lower inventory balances. Even further does create a short term fixed cost absorption challenge.

Although we are aggressively optimizing the company's manufacturing labor force within the confines of our existing plant network fixed cost deleveraging will still weigh on our second half gross and operating margins.

Second half operating margin will also be impacted by our decision to invest in capability building and brand support to implement and accelerate critical aspects of our new corporate strategy.

Given that context, we've assumed the following for the third quarter.

Net sales of $2, one one to one 6 billion with core sales down 7% to 5%.

Traditionally we do not respectively comment on gross margin, but in this instance, we think it's important to point out third quarter normalized gross margin is expected to represent an inflection point as strong productivity gains inclusive of our simplification efforts and July versus pricing activity across roughly 30% of our U S business, primarily in the home and commercial.

Solutions segment are only partially offset by inflation and fixed cost absorption.

We expect SG&A to be higher on a year over year basis in both dollar terms and as a percentage of sales as we increased brand support and invest in front end capabilities, such as consumer and customer understanding revenue growth management data analytics and retail execution among others.

Parenthetically last year's third quarter, SG&A was favorably impacted by a meaningful drop in management compensation accruals.

Third quarter normalized operating margin is expected to be in the range of eight 5% to nine 4%. While this is admittedly down versus last year. The rate of decline is expected to ease relative to both Q2 and the first half as the structural economics of the business should continue to improve.

We forecast interest expense to be substantially higher year over year and expect a mid teens tax rate.

All in we are guiding to normalized third quarter earnings per share in the range of 20% to 24.

For the full year, we expect net sales of $8 two to 834 billion driven.

<unk> core sales decline of 12% to 10% nor.

Normalized operating margin is expected to be seven eight to eight 2% as we reflect the negative top line flow through and incremental capability investments discussed earlier.

Interest expense is forecasted to be up slightly versus year ago and the tax team has done some terrific planning work, which should create a sizable tax benefit in the fourth quarter, assuming that benefit is realized the full year normalized effective tax rate is expected to be close to zero.

Normalized diluted earnings per share are now expected to be 80% to 90.

Relative to cash which was our number one priority. This year, we continue to anticipate $700 million to $900 million of operating cash flow inclusive of $95 million to $120 million of cash payments related to project Phoenix, which remains on track to realize $140 million to $160 million of pre tax savings this year.

The midpoint of our operating cash flow range implies operating cash flow will improve by more than $1 billion year over year with free cash flow productivity comfortably above 100%.

So with all that said, let's summarize the key takeaways from today's call.

First top line pressures are expected to persist throughout the balance of the year, but as core inflation moderates trade destocking slows and we cycle against easier comps, we anticipate that our topline results will improve on a relative basis.

Second we believe the underlying structural economics of the business will improve in the back half behind significant interventions across all facets of the business in fact at the midpoint of our guidance range. We expect second half normalized operating margin to expand over 200 basis points versus year ago, and more than 350 basis points versus the first half of this year.

Frankly, this would be a good outcome since again using the midpoint of our range full year net sales are expected to be down approximately $1 $2 billion versus last year.

Moreover, since we expect inventory to drop by approximately 25% year over year and the July price increase the negatively impact unit volume what could reasonably assume production volumes will be down this year by 20% to 25%.

Thus the amount of cost takeout required to hold Newell's gross margin flat, let alone expanded against this backdrop is not inconsequential and should provide significant positive financial leverage once the macroeconomic environment stabilizes and we begin to see the benefits of a major pivot we are making in our front end consumer facing capabilities.

Third the year over year increase in operating cash flow is expected to be at least $1 billion, which speaks for itself.

Finally, we now have a unified corporate strategy based on a comprehensive companywide capability assessment with very clear where to play and how to win choices. We believe strongly in the strategy and are investing behind it as we move with deliberate speed to unlock the full potential of Newell's portfolio of leading brands.

Operator, if you could please open the call for questions.

Certainly ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question Westar. One again, please standby, while we compile the Q&A roster.

Now first question coming from the line of Bill.

Bill Chappell with <unk> Securities. Your line is open.

Thanks, Good morning.

Good morning Bill.

Just two I.

I guess I'm trying to understand.

The front facing moves right now in terms of its looking more sounding more with brand managers and focus on core brands.

Kind of a P&G model.

Historically.

Lot of Newell's categories don't have a whole lot of marketing or advertising and promotional support.

And so it was a kind of deemed as not always that necessary. So I'm just trying to understand going forward youre going to be stepping up and doing more.

Merchandising marketing stuff like that when a lot of your competitors won't.

So I'm just trying to understand how useful this will be it certainly will help that but.

How you kind of looked at the categories when applying this model to it.

Yes.

That's helpful and then try to provide a little bit of perspective.

One of the things that we identified when we did the.

The capability assessment was that because we're coming from a place where every business unit and every category was operated sort of independently. We did not have centralized standardized processes and approaches on the front end capability like we've been driving over the last four years on the.

Hi chain in the backend.

So when you look at the company's performance.

You can see pockets of good performance. So if you look at the most recent periods, where growing market market share on brands like sharpie on rubbermaid on Expo on Crock pot, but we're not growing market share.

On.

A wide swath of other brands and we believe the reason we're not growing market share broadly across the company is because we don't yet have.

The capability in place on consumer and customer understanding innovation brand building brand communication retail execution consistently across all parts of the portfolio.

We do believe because we're starting from leading brands.

And our top 25 brands over two thirds of them are leading brands in the categories in which we compete we do believe that this model applies broadly we've seen examples.

Based on all of the businesses that we're in.

Of the people that are growing market share are in fact, applying this model and so we think as we begin to drive and standardized and build this capability more broadly across the company.

And apply the same amount of operational rigor to it that we've done over the last several years on the supply chain in the back office. We think we can have a meaningful inflection point.

In terms of getting to a more.

Sustainable top line growth algorithm.

Got it.

Cant remember if I'm allowed to follow up but I'll ask anyways.

Mark can you just maybe give us a breakdown of the <unk>.

In terms of the guidance, what like buy buy baby, what the change in terms with retailers in terms of inventory.

Any just kind of roughly how thats negatively impacting in buckets the guidance for the top line for this year.

Yes, let me let me help you out with that so you might get a little bit more than you were anticipating here, but let's be clear on this point. So our prior range was <unk> 95 to $1 eight and we said we'd be towards the lower end of that range. So let's just take 95 is the starting point.

From there, Chris and Numerate at a number of items that are going to lower our sales in the back half. So I won't repeat those here, but that's obviously fairly consequential along with that we have chosen to take our inventory levels, even lower in order to ensure that we can maintain our cash flow range for the full year.

In addition, we have some capability investment that we're making which we cited some A&P investments that we talked about as well and then there is a little bit of other items in there that are kind of mixed related those items are only partially offset by a meaningful progression in our programs related to cost takeout. This year will be an all time high we actually expect to take out about 6% of Cogs.

Through the fuel initiatives programs that we have in place and then there'll be a little bit of resin helped a little bit more transportation up a little bit of positive FX in the second half of the year. So taking all those elements together that would take you from roughly 95, let's call. It down to set and then we have a tax benefit that we have contemplated and put in that's worth roughly 15 that brings you to 85.

Which is the midpoint of the new range that we provided 80 to 90.

And bill on the topline of the three factors I cited I would say that the.

The student loan repayment and the more conservative stance on discretionary products.

As the first item.

The direct import to domestic shift are the two biggest of those items the buy buy baby is a little bit smaller.

Relative to the topline.

Guidance change.

Got it thanks, so much.

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

Great.

First question is on gross margin you gave a lot of detail on the changes to your sales outlook, but hoping to get some color on gross margin question can you just show some sequential progress and assuming you continue to see that sequential progress we should should we expect it to turn positive in second half.

Is that a fair assumption.

So can you talk about some of the drivers that better.

Better underlying that thank you.

Yes. Thank you we feel really good about where we are with gross margin right. Now if you looked at our first quarter results gross margin was roughly 27% in the print that we just issued gross margin was $29 eight so meaningful progression and as we think about the first half versus second half dynamics.

We're very confident that second half gross margin will be several hundreds of basis points higher.

And then where we were in the first half probably three to 400.

What's driving that is the fuel productivity program that had been placed for a number of years now but that program has only increased in its intensity now that we've consolidated the supply chain behind the Phoenix organizational changes, we are literally on pace to take about 6% of Cogs out of the gross margin line this year alone.

Which is quite important because we're still dealing with a lot of the after effects of inflation inflation in the first half of year is probably running around 400 basis points of the negative in the second half, we think it'll be more like 100 basis points of compression because of inflation itself. The other thing that we're doing that we talked about in the past with DC consolidation work, where we're going to be going from effectively call. It one.

9 million square feet is paid down to maybe one five the network might go from 30, <unk> down to something more like 'twenty, we talked about in the script. The fact that we have just recently got a four wall cost assessment.

That will save on an annualized basis over $50 million by getting after over overheads and plant overhead and indirect operational elements along with some direct shifting crews and Theres just a whole range of other things on the AE side that we're also getting after so we feel like the productivity program is only gaining strength and that's one of the reasons we feel good about gross margins also.

There's a lot of other things at play like the pricing effect that we just put in 471, which will bring a bunch of additional pricing into the second half. So yes, we feel very good about where we are with gross margin I think as you know we've had a gross margin compression every year since the Jarden acquisition and this is the year that we're hoping to turn that around.

Got it thanks, and then given your updated views on resource allocation across brands and categories and geography.

Can you give us some idea whether there are brands that are in.

So are you seeing more spend rather than lesson in the level of urgency.

Youre expecting versus where it currently stands on our brands and are going to see.

Less support.

Yes, we are.

Or as part of our plan, but we are spending more money on A&P. So the A&P spend that we planned in the back half of the year is up versus last year and significantly up versus the front half of this year and it is disproportionately focused on our leading brands.

So for example, we feel and part of the reason we feel very good about the back to school period, which were just entering.

Our customer service results have improved markedly as Mark mentioned from our fill rates in the low eighties to fill rates in the mid to high <unk> on the writing business. We've had a terrific sell in and back to school in the writing business. Despite the core sales for the company being down in Q2, the writing business was up.

In Q2 on core sales our share of retailer assets.

<unk> has improved this year versus prior year.

And because of that we are planning to spend more money in A&P. This year than last year against that because we believe we are well positioned for the season, we obviously haven't seen consumption yet.

But we believe that's a good use of.

Investment dollars at the same time.

We said when we rolled out the strategy that we have 80 master brands and there is 25 that represent.

90% of the sales and profits that were going to be focusing on so at the same time, we are prioritizing spending on those bottom 55 brands because we believe the return on investment is much higher on the top 25.

Thank you.

Yes.

Thank you and our next question coming from the lineup.

<unk> with Jpmorgan Your line is open.

Thank you I wanted to go back to what you just said to <unk> question on this 55 branch Chris.

And of course this company has been through a huge transformation.

And kind of optimizing.

And you're selling brands and doing all of that image.

Kind of deleveraging that you went through I wonder if there is any thoughts to be made.

Some of these brands being divested.

And Conversely, just one.

Think about like what does this sound like some of the as you go through days or is it something that you're going to be SaaS.

Post all of this transformation process that this product that this project. Thanks Jill.

Keeping you and starting to give you this year and then on your comment and just a clarification on your comment about back to school question, you haven't seen consumption Ian.

This category also going through in your view some of the reductions that.

We have been going through.

Sure.

For inventory or does this pretty much more immune and given that this still is it still positive impacts from reopening in office and all of that thank you.

Yes, So let me let me start with the back to school question, the writing business or the writing category is a little different it is not going through the same dynamics on retailer destocking consumer discretionary pullback et cetera, the writing business is much more normalized.

We feel very confident that we are set up to gain market share. During this back to school period, depending on which projection you look at some people project the writing category to be slightly down versus last year. Some people projected to be flat in some people to be up slightly.

I think we're trying to take a middle of the road view on that.

But we're very confident that we're set up.

Very well to gain market share during the period.

On the 55 brand question.

That represents 10% of the company's sales and profits I would put those 55 brands into three buckets. The largest bucket of the 55. There are brands that we are going to continue to sell but we are just are going to.

Support less so to speak in terms of innovation resources.

We'll continue to support them fully in terms of sales resources, but we think our innovation resources. Our A&P dollars are better spent on the top 25, then this other category so consider that sort of a.

Our milk type column, if you will for those brands, there's a second category of brands.

That we are going to proactively look to discontinue.

These are brands that represent a very small percent of the companys revenues and profits and frankly are a distraction and we believe we're better off just be listing them because we don't believe that our saleable. We don't believe there are significant and we don't.

We don't think it's worth it to even go through the effort of trying to sell them. So there'll be some brands in that category.

And then there's a third category, where we're going to look to do something different and that could be a divestiture or a licensing.

Life opportunity that will be a small subset I don't think youre going to see massive change like we've had in the past from an M&A divestiture standpoint that is not our strategy.

We believe that we have a strong portfolio, we just want to focus our efforts and our resources on the biggest brands that are market, leading which represent 90% of the sales and profit of the company.

And Chris just a follow up on that.

So thinking about the 10% headwind that eventually we are going to see happening of course, we don't know the size the size of each of the buckets that you just described.

But.

Assuming that there is like call it mid single digits.

Potential headwind if you were.

Just simply to list some of these tiers second bucket or.

Potentially sell like is that something that we should be wary about into 2024.

That could be a headwind or do you are going to manage these gradually.

Yes, I think we're going to manage it gradually I don't expect it to be that high I think could there be a period in the future where we have a low single digit headwind from this possibly but I think this is going to be an over over time thing I don't think it will rise to a mid single digit type level in any in any given year.

Thank you.

Thank you and our next question coming from the line of Dana from UBS. Your line is open.

Thanks, operator, and good morning, everyone. So thank you so much for the color on the building blocks of our guidance. This year, but I was just hoping to understand the implied ramp in the fourth quarter. Just in terms of operating margin. It just seems the outlook implies several hundred basis points of operating margin expansion. So.

You sounded quite optimistic on gross margin. So can you just unpack that or whats implied in the fourth quarter of it and then.

Back in June you kind of mentioned core sales below algorithm operating margin expansion on algorithm for the next year I think it was 12 to 18 months, but just seems that the exit rate would be implying something well ahead of that so is there anything specific about <unk> that we really shouldn't be extrapolating in terms of thinking about operating margin expansion into next year.

Thanks.

No. It's great question. So look I guess this is what I'd offer and this is what I would say without getting bogged down in quarter dynamics as we think about the first half versus the second half and as I. Just mentioned earlier, we think gross margin is going to continue to grow sequentially.

Through the balance of the year and we actually expect the second half gross margin to be roughly 400 basis points above the first half for all the reasons I cited the fuel productivity efforts and everything is going along with it the pricing effects that are in place. There are some normal business seasonality, where we tend to have a slightly higher percentage of our total year sales in the back half we think the trade Destocking will abate as we go further along.

Our comps get easier we have more in the first half in the second half as a whole litany of reasons why we're very very confident that we have that progression right with gross margin growing. So strongly we also see operating income percent of sales following along as well and we have that up roughly the same amount by about 400 basis points one of the things I think.

As notable as we talked about the capability investments, we're making I think we've demonstrated the ability to affect cost in a very positive way and youre seeing that to the gross margin line. If you think about what we're doing as it relates to overhead however overhead dollars in the first half versus the second half will be roughly comparable because we're choosing to make investments in talent upgrades change management.

All of these process improvements data and technology enhancements.

And then on the E&P side, you heard Chris mentioned it earlier, we're actually going to probably be spending 50% more in the second half than we spent on the first where we have compelling consumer proposition.

And if we think about the question that was asked earlier about the new smaller brands, maybe being a drag on the business that might be true in part, but we believe the focus that can be put against the top 25 brands and the additional resources that go against those will more than offset that as we really start to accelerate.

Top line.

Regard with your question about the commentary we provided at Deutsche Bank. When we talked about the next 12 months to 18 months I don't think what we provided there was explicit guidance per se, but we try to stay within the next 12 to 18 months is going to be characterized by a number of external challenges.

Inflation is still going to be moderate to high or suddenly some level of destocking I think the mild recession that we were concerned about it maybe less relevant now it seems like maybe we will avoid that which would be a good thing, but during that time really fronting.

Dollars towards the capability build out that we've spoken to and doing the brand rationalization effort. So we had said that the core sales will be below our evergreen targets. We think thats true, we said free cash flow productivity will be at or above in this year. We're targeting over 100 now based on the good work that's being done and then we said there'd be operating margin expansion at the evergreen target, which is roughly 50 basis points.

Again that wasn't explicit guidance for any given quarter. This year clearly we have really strong progression on operating income as a percent of sales in the second half versus the first and we are going to be over time, making some choices.

<unk> the bottom line progression on margin with additional A&P investments that we choose to make in order to put more marketing support behind our top brands.

It's going to be a balanced approach going forward, we feel really good about where we are if you look at sequentially across every element of the P&L is playing out the way that we would have hoped.

No that's super helpful. And then Chris I just had a question.

On visibility.

The second straight quarter here, where things are moving a bit lower particularly around the core sales out easily.

<unk> historically been very prudent so I guess I would just as visibility improves.

To the point, where you feel like you can kind of get back to that conservatism. If you will and the outlook. So that we don't really see another call down or does it still remain.

Bit murky.

Yes, what I would say on visibility as it is a challenging visibility period, primarily because we're dealing with.

The normalization from from a once in a lifetime pandemic.

Covid, we're dealing with this massive inflation, that's starting to come down and the impact that's having on consumer purchases were dealing with retailer.

Patterns on inventory that are unusual in nature as a result.

The visibility is getting better I will say that we were encouraged that we came in right.

Right in the middle of our topline guidance range for Q2 on core sales growth. So we hit the Mark on the Q2 guidance obviously the further out you go.

The more challenging it is to provide top line guidance.

The thing that we're focused on is.

Is what's in our control.

And we are moving at pace on the capability investments.

Have.

<unk> brought in new talent.

<unk> brand management and innovation.

A new head of consumer insights.

We've changed out leadership in the outdoor <unk> recreation.

Segment.

And we have chartered projects specifically to go after improvement in the areas, we talked about consumer and customer understanding innovation brand building brand communication retail execution, and we are driving at pace on that and we believe that those things.

It will play out over the next 12 months to 18 months theyre not going to happen immediately because these things take some amount of time.

But when we the thing that we're excited about is as we begin to make those improvements when you couple that with a.

A very high performing supply chain and back office organization Thats delivering record.

Cost takeout levels, we're very optimistic about where we can take this business over the next couple of years.

Sure.

Thanks, So much I'll pass it on.

Thank you and our next question coming from the lineup.

Lauren Lieberman with Barclays. Your line is open.

Great. Thanks, good morning.

I know it might seem crazy to want to look.

Further out at this point, but.

I guess I was just curious you guys had talked about evergreen 50 basis points on average margin expansion, but what about the conversation and kind of longer term.

Benchmarking because I understand unequivocally the opportunity that could be ahead in terms of positive operating leverages all the structural cost take out that youre doing.

Getting to a more stable and stronger and predictable top line.

But I'm just kind of not sure how to think about the reinvestment and capabilities as well.

And so even like if I look at my numbers right now.

Look at general expense like should I be thinking about 'twenty four is kind of reaching a benchmark level of proper.

<unk> been in the business.

And that you are making that step change this year.

Quarter period, probably or does that keep building. So just anything you can offer on maybe longer term benchmarking on structure of the P&L would be helpful. If you're willing to go there.

Yes, let me try to provide a little bit of help.

So let me start with.

24.

I think in 'twenty four.

We're likely to have we've got a number of things that are.

Effectively onetime in nature in 'twenty, three that should allow 24 to be a bit of a bounce back year in terms of operating margins. So in.

I will just give you a few of them.

Inflation, which is.

It is significant particularly in the first half of this year largely because of capitalized variances that are rolling off should be behind us and as a result based on what we're seeing today, we expect inflation to be a much smaller number in 'twenty four than it was in 'twenty three we also expect.

Fixed cost absorption to be a materially smaller impact in 'twenty four 'twenty three because recall that this year, we're dealing with the revenue decline plus we're taking inventory down on top of that and so.

That fixed cost absorption number is somewhat one time in nature. We also mentioned that our productivity is ramping up and we've got a very strong funnel.

That we believe is going to continue to drive very strong productivity next year.

In addition to that this year as we're reducing inventory.

We are being aggressive on what we call excess and obsolete inventory. So that we end the year with a clean inventory level on some of that excess and obsolete inventory were.

A liquidating at a discount that that we don't think we'll have to do as we head into next year as we've gotten our inventory levels better and then obviously the retailer inventory destocking is somewhat onetime in nature and so all of those things would tell you that in 'twenty four we should.

We should have an above algorithm year.

Certainly.

On margins and.

That's what we're shooting for.

But I don't believe that 'twenty four is the end of the margin story, though I think we have a significant opportunity going forward to continue to build operating margins for.

For the next really three to five years.

Cause a lot of the front facing capability that we're putting in place.

It is also in addition to getting topline growth going going to get margin going because when you develop.

Category driving innovation.

That is focused on large leading brands that is targeted for the MPP and hp's segments, which our strategy calls for those tend to be gross margin accretive initiatives and that is our strategy and so as we put this.

Consumer facing capability in place, we believe that our innovation pipeline will get stronger we believe the innovation pipeline will lead to.

Better category growth better market share gains and gross margin improvement from a mix standpoint.

And so.

All of those things have us.

Confident that the longer term margin opportunity in this business is significantly higher than where we are today.

Sorry, if I could add just one point that I think is relevant.

Had gross margin right around 30% in Q2, we talked about the fact that the second half is going to be considerably stronger for the reasons that Chris just reiterated so our exit rate will be several hundred basis points beyond that and that's when we're still operating 46 manufacturing sites with capacity utilization frankly, now given where we are probably in the low thirty's.

90% of which are single sourced and many of which are in the right geographic locations to really optimize the global supply chain. So we think we have tremendous opportunity.

On the cost takeout side as well as all the innovation that we brought forward there'll be more MTP HCP.

To push that meaningfully forward, which will give us I think the ability to spend more in A&P also expand our operating margins considerably over time, while we get more efficient on the overhead line as the sales revenue start to come back to us. So we feel very good about the <unk>.

Proposition about monetizing this business over any reasonable period of time.

Okay. Thank you. Thanks, so much I was really comprehensive I appreciate it.

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

Thanks, Thanks very much.

So.

Okay.

You just you just articulated makes it makes good sense to me is.

It is exciting if you want to kind of.

Circling back to what Peter was asking about in terms of the.

The commentary.

A few months ago about the next 12 to 18 months not being a straight line.

Yes, Chris just described about.

Exiting exiting 'twenty three and then the <unk>.

Back here in 'twenty, four seems to run counter to that.

Next 12 to 18 months being a lot more a lot more grounded.

Maybe it's just a.

And kind of macro assumptions, but just seems like a very very different message as to how we think about.

Back half 'twenty, three and 'twenty four.

Grounded.

June commentary versus grounded in your recent commentary. So if we can just square that circle for me.

Yes, I think.

If you step back I think that.

We're trying to.

Drive significant capability.

Improvement.

In a turnaround situation.

That the company is in a tough macro context that is hard to predict.

And when you put those things together and you say the macro.

Environment currently as a headwind, we think it's going to turn to a tailwind or at least moderate but it's hard to predict exactly when that's going to happen.

We know that we're on the right track from the strategy that we have just deployed.

Six weeks ago, but we also know that it's going to take time to drive these capability improvements because they.

They are significant changes to the way the company operates and we are moving the company into a new operating model with project Phoenix, and so it's hard to predict exactly which quarter do those capability investments show up we're very confident that they show up in the financial results two to three years from now, but whether they show up next.

Quarter to quarter after or the quarter. After that is hard to predict and so I think the message that we were trying to deliver on the path forward not being a straight line as we believe that the that the line is going from the lower left to the upper right. We just don't know I can't tell you on a quarter by quarter basis exactly.

What the slope of that line is going to be but if you look back a couple of years from now from where we are today, we believe youre going to have seen significant and material improvement in the performance of the company right and if I could add one thing and during that period. When we say core sales growth will be below the evergreen targets because of obviously all the reasons that we've been discussing today we were.

We're saying that cash is going to be our top priority and it is going to be.

Moving forward above our target and this year, we're going to be probably be a 100% free cash flow productivity.

And we're better and then the operating margin expansion is going to continue in part because the gross margin to take out so big and so extreme and we're very confident that is going to come to pass I mean, so we feel like over the next 12 to 18 months sales might be a real challenge, but margin will progress and cash will be our focus.

Okay. Okay. Okay.

And I guess is there is there.

As part of the strategy.

A lot of.

Top line accelerators over the course of time.

Margin expansion drivers.

Okay.

I guess.

Maybe at this point is there kind of a.

Like a time order prioritization of where you think you just kind of more of the low hanging fruit is versus more of the kind of longer term aspirational elements.

But then as we go forward you can speak.

You're getting some kind of scorecard against against those so we can track progress or how are you thinking about.

Both are achieving achieving them and also kind of communicating your progress as we go.

Yes, I think I think it's a good thought.

<unk>.

We obviously have an internal scorecard, that's very detailed that we have just sort of put together. So once we finalize the strategy.

We effectively chartered capability improvement projects with clear Kpis owners timelines against each of them and we are pursuing all of them simultaneously.

They have different timelines relative to the execution, so the consumer and customer understanding capability improvement.

Plan and timeline for example looks different than creating a brand management organization timeline.

And so.

So we will endeavor to provide.

Some more clarity on that.

As we go forward I think we're.

We're at the place where we've commissioned all the projects we have owners, we have timelines we have a clear plan.

And.

And we're off and running we're not delaying on any project, which is why I mentioned in the prepared remarks that the pace of change at the company.

Is accelerating dramatically because we're taking on a lot in terms of capability improvements.

Last thing I would say is that.

If you if you were to raise how difficult is it to do these capability improvements.

Typically when you think about capability improvement oftentimes people think about changing the people the process and or the technology.

We've made dramatic improvement in the supply chain and in the back office and simplification that we've been talking about over the last couple of years, whether it be the ERP systems the <unk> applications.

Fuel productivity program, the SKU count et cetera, all of US all of that has gone well that actually is harder to do than what we're talking about on the front end.

And that back and the supply chain in the backend oftentimes, there's a meaningful technology component that is required that takes longer and the front end it tends to be more people and process focused so it doesn't mean, it's easy, but it can happen faster and.

So we have chartered the projects and the owners on aggressive timelines to begin to make progress.

Okay. Thank you very much.

Thank you.

And our last question comes from the line of <unk> from Citi. Your line is open.

Hey, good morning, everyone.

Cover a lot of ground I, just wanted to and maybe Chris you clearly announced a lot of the strategic changes coming on more.

More recent changes on the front end.

The kind of the restructuring programs changes in capital allocation any other areas, where you think like there is more focus on your end in terms of potential sort of changes in the organization that we should be thinking about.

I think we're at a point, where with the operating model change with the capability assessment and the new strategy. We've deployed we're at a point, where I think we've done all of the strategy work from a company standpoint at this point or at least we've got the 90 for the 10, let's call it.

Our focus now is shifting to drive that strategy into execution.

And rather than sort of debate the strategy at this point, we think we've got the right strategy and.

Our strategy doesn't really come to life unless you executed at the point of attack and we need to drive that strategy and execution and that takes time, because you have to communicate it.

To the segments you got to communicate it to the geographies you have to communicate it to the functions you have got to make sure that azure cascading that strategy throughout the organization. It ultimately gets into every individuals.

Work plan and as you do that you begin to change the trajectory in the direction of the enterprise and so.

Don't expect that we're going to have significant.

Changes in.

And strategy at this point I expect what Youre going to hear US talk more about is our progress in driving the strategy into action and execution.

Great. Thank you that's helpful.

Thank you.

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 Dot Dot Com you may now disconnect everyone have a great day.

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Okay.

Good morning, and welcome to Newell brands second quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

After a brief discussion by management, we will open up the call for your questions.

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 call is being recorded.

Webcast of this call is available at IR Donyell branch Dot com.

I will now turn the call over to Sophie <unk>, Vice President of Investor Relations Mr. <unk>.

You may begin.

Thank you good morning, everyone and welcome to Newell brands second quarter earnings call on the call with me today are Chris Peterson, our president and CEO and Mark <unk>, our CFO before we begin I would like to inform you that during the course of today's call, we'll be making forward looking statements, which involve risks and uncertainties actual results.

Outcomes may differ materially and we undertake no obligation to update forward looking statements I refer you to the cautionary language and risk factors are available in our earnings release, our Form 10-K forms 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 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.

<unk> of these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables that were furnished to the SEC. Thank you I'll now turn the call over to Chris.

Thank you Sophie and good morning, everyone and welcome to our second quarter call second quarter results were in line with or ahead of our projections on all key metrics as expected topline results were pressured by normalizing category trends constrained consumer spending on discretionary products and retailer inventory destocking.

Operating margins earnings per share and cash flow were all well ahead of expectations as we made meaningful progress on productivity initiatives and working capital reduction.

While our results met or exceeded our expectations for the quarter on an absolute basis, we aspire for significant improvement going forward.

Will not be a straight line.

During our first quarter earnings call, we laid out five key priorities for fiscal 2023, which are all progressing nicely. Let me say just a few words regarding each of them.

First starting with operating cash flow year to date, we have driven a year over year improvement of over $700 million.

Largely by right sizing, our inventory levels through improved forecasting and supply planning processes.

Second gross margin performance improved sequentially behind our ongoing fuel productivity program and project Ahmed, which you will recall completely transform Knowles domestic go to market operations. We are on track for a record high year on productivity savings across the supply chain.

Third project Phoenix of simplifying and strengthening the organization by leveraging scale, reducing complexity and streamlining the operating model and driving operational efficiencies program is pacing well and is on track to deliver $220 million to $250 million in pre tax savings upon its full implementation.

Finally, we have successfully transitioned to and are operating in a new operating model with three segments centralized manufacturing and supply chain and our one all approach with our top four customers and across most geographies.

It is from this much improved operational and organizational foundation that we made an important where to play choice to focus on and drive a disparate.

A portion of that amount of our organizational and financial resources to our top 25 brands and our top 10 countries, which each represent about 90% of sales and profits.

Once that decision was made we turned our attention to our how to wind choices, which were fully informed by the capability assessment, we have just completed.

That assessment clearly demonstrated the need for us to significantly improve our abilities and consumer and customer understanding innovation brand building brand communication and retail execution.

Why when we revealed our new strategy in Paris last month, we said, we are making a major pivot in our front end consumer facing capabilities to properly support leading brands in top countries.

Since these how to wind choices, our cornerstone elements of the new integrated strategy. We have started to fill talent gaps across key areas and have established clear action plans and kpis for each capability improvement project for.

In addition, we recently revamped Knowles innovation process, which will be underpinned by proprietary consumer insights as part of this work, we designed and instituted a project clearing system and implemented an enterprise wide biannual innovation process to sharpen the company's innovation plans drive alignment on the <unk>.

Channel and determined prioritization and resource allocation as we identify bigger bets.

We also put in place a centralized tracking system for all new initiatives to enable multi year technology platforms and ensure appropriate financial rigor to drive accretive margins.

Relative to brand building and brand communication, we are building out a comprehensive brand management function, which was not in place previously.

Although it is still early days I'm encouraged by the progress we are making in bringing the integrated set of where to play and how to win strategies to life.

Importantly, these are not just corporate plans they have been formally cascaded throughout the organization and forming the segment functional and regional strategies, where work is ongoing key members of our leadership team and I have visited six of our top 10 countries across Europe , and Latin America in the last two months to ensure we are driving.

The strategy and the execution.

Now before turning the call over to Mark who will discuss our financial results and outlook in detail.

I wanted to address the revisions we have made to our top line estimates for the second half of the year.

Income.

Second several of our major retail customers recently revised their shipping terms on our business moving from what is known as direct import to domestic fulfillment.

We welcome to this move because we expect this change to be a positive for newell longer term. It does put additional onetime pressure on back half shipments as their weeks of inventory coverage comes down further as a result of the transition.

Revising our topline outlook and related demand plan now allows us to continue the strong progress we have made on inventory reduction, which is why we are maintaining our operating cash flow guidance for the year.

<unk> the Companys manufacturing Labor force. These decisions are never easy, but we are committed to building a one all optimized global manufacturing network that minimizes total landed cost to optimize asset utilization and Leverages <unk> global scale.

Where appropriate we will of course share more of the relevant details as plans are finalized.

These topline revisions notwithstanding we remain optimistic on the back to school season, which kicks into full gear in the coming weeks.

We continue to expect much stronger performance for the company in the back half relative to the first half of the year.

The pace of change has accelerated across the company and we are moving with speed and agility to unlock the full potential of the enterprise on a personal note I would like to thank Knowles employees for welcoming me as their new CEO .

And for their strong endorsement of the new company strategy.

Their unwavering commitment to our purpose of delighting consumers by lighting up everyday moments inspires me every day we.

Thus, while the 13% contraction in net sales of $2 2 billion and the 11, 9% decline in core sales might on the surface be discouraging. We believe a more thorough examination showed the interventions we've made to improve the underlying structural economics of the business and strength in operating cash flow are working as intended.

For example, normalized gross margin and operating margin both improved sequentially due to enhanced productivity efforts and project Fenix savings, which were critical in helping mitigate the significant 400 basis points headwind during the quarter from inflation.

In addition, during the second quarter net interest expense did increase $21 million of $76 million, reflecting overall higher debt and interest rates versus a year ago, but the decision to right size the dividend in a nearly $700 million year over year reduction in inventory allowed us to lower debt levels versus last quarter by nearly 300 million.

<unk>.

Our effective normalized tax rate of 13, 7% was slightly below year ago, which when combined with the other elements. We just reviewed brought normalized diluted earnings per share and at 24.

Which was considerably better than the 10% to 18 outlook. We had previously provided.

Turning to operating cash flow the planning team did a great job managing inventory levels down while increasing fill rates, which in North America improved to 94% year to date from 82% last year.

This allowed us to generate $277 million of positive operating cash flow year to date through the second quarter.

Importantly, this stands in Stark contrast to our $450 million use of cash during the same period last year.

Therefore through the first six months of 2023 operating cash flow improved by more than $700 million.

And encouragingly in transit inventory as of June 30 was approximately $275 million below year ago levels. So we are competent inventory levels will be even lower throughout the balance of the year.

Second half operating margin will also be impacted by our decision to invest in capability building and brand support to implement an accelerated critical aspects of our new corporate strategy.

Given that context, we've assumed the following for the third quarter.

Net sales of $2, one one to one 6 billion with core sales down 7% to 5%.

Traditionally we do not prospectively comment on gross margin, but in this instance, we think it's important to point out third quarter normalized gross margin is expected to represent an inflection point as strong productivity gains inclusive of our simplification efforts and July <unk> pricing activity across roughly 30% of our U S business, primarily in the home and commercial.

Solutions segment are only partially offset by inflation and fixed cost absorption.

Parenthetically last year's third quarter, SG&A was favorably impacted by a meaningful drop in management compensation accruals.

We forecast interest expense to be substantially higher year over year and expect a mid teens tax rate.

All in we are guiding to normalized third quarter earnings per share in the range of 20% to 24.

For the full year, we expect net sales of $8 two to $8 $34 billion driven.

Driven by a core sales decline of 12% to 10% nor.

Normalized operating margin is expected to be seven eight to eight 2% as we reflect the negative top line flow through and incremental capability investments discussed earlier.

Normalized diluted earnings per share are now expected to be 80% to 90.

The midpoint of our operating cash flow range implies operating cash level improved by more than $1 billion year over year with free cash flow productivity comfortably above 100%.

So with all that said, let's summarize the key takeaways from today's call.

Frankly, this would be a good outcome since again using the midpoint of our range full year net sales are expected to be down approximately $1 $2 billion versus last year.

Moreover, since we expect inventory dropped by approximately 25% year over year and the July <unk> price increase and negatively impact unit volume what could reasonably assume production volumes will be down this year by 20% to 25%.

Yeah.

Thus the amount of cost takeout required to hold Newell's gross margin flat, let alone expanded against this backdrop is not inconsequential and should provide significant positive financial leverage once the macroeconomic environment stabilizes and we began to see the benefits of the major pivot we are making in our front end consumer facing capabilities.

Third the year over year increase in operating cash flow is expected to be at least $1 billion, which speaks for itself.

Finally, we now have a unified corporate strategy based on a comprehensive companywide capability assessment with very clear where to play and how to win choices. We believe strongly in our strategy and are investing behind it as we move with deliberate speed to unlock the full potential of Newell's portfolio of leading brands.

Operator, if you could please open the call for questions.

Certainly ladies and gentlemen to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question Westar one again.

<unk> will be compile the Q&A roster.

Now first question coming from the line of Bill Chappell with <unk> Securities. Your line is open.

Yes.

Thanks, Good morning.

Good morning Bill.

Just two.

I'm trying to understand.

The front facing moves right now in terms of its looking more sounding more with brand managers and focus on core brands.

Kind of a P&G model in and I guess historically.

A lot of Newell's categories don't have a whole lot of marketing or advertising and promotional support and.

So it was a kind of deemed as not always that necessary. So I'm just trying to understand going forward youre going to be stepping up and doing more.

Merchandising marketing stuff like that when a lot of your competitors won't and so I'm just trying to understand how useful this will be I mean, it certainly will help that but how you kind of looked at the categories. When applying this model to it.

Yes.

That's helpful and then try to provide a little bit of perspective.

One of the things that we identified when we did the.

The capability assessment was that because we're coming from a place where every business unit and every category was operated sort of independently. We did not have a centralized standardized processes and approaches on the front end capability like we've been driving over the last four years on the.

Hi chain in the backend.

So when you look at the company's performance.

You can see pockets of good performance. So if you look at the at the most recent periods, where growing market market share on brands like sharpie on rubbermaid on Expo on Crock pot, but we're not growing market share.

On.

A wide swath of other brands and we believe the reason we're not growing market share broadly across the company is because we don't yet have.

The capability in place on consumer and customer understanding innovation brand building brand communication retail execution consistently across all parts of the portfolio.

We do believe because we're starting from leading brands.

And our top 25 brands over two thirds of them are leading brands in the categories in which we compete we do believe that this model applies broadly we've seen examples.

Based on all of the businesses that we're in.

Of the people that are growing market share are in fact, applying this model and so we think as we begin to drive and standardized and build this capability more broadly across the company.

And apply the same amount of operational rigor to it that we've done over the last several years on the supply chain in the back office. We think we can have a meaningful inflection point.

In terms of getting to a more.

Sustainable top line growth algorithm.

Got it.

Cant remember if I'm allowed to follow up but I'll ask anyways.

Mark can you just maybe give us a breakdown of the <unk>.

In terms of the guidance, what like buy buy baby, what the change in terms with retailers in terms of inventory.

Any just kind of roughly how thats negatively impacting in buckets the guidance for the top line for this year.

<unk> that we talked about as well and then there is a little bit of other items in there that are kind of mixed related those items were only partially offset by a meaningful progression in our programs related to cost takeout. This year will be an all time high we actually expect to take out about 6% of Cogs through the fuel initiative programs that we have in place and then there'll be a little bit of resin.

A little bit more transportation up a little bit of positive FX in the second half of the year. So taking all those elements together that would take you from roughly 95, let's call down to set and then we have a tax benefit that we have contemplated and put in that's worth roughly 15 that brings you to 85.

Which is the midpoint of the new range that we provided of 80 to 90.

And bill on the topline of the three factors I cited I would say that the.

The student loan repayment and the more conservative stance on discretionary products.

As the first item and the direct import to domestic shift are the two biggest of those items the buy buy baby is a little bit smaller.

Relative to the topline.

Guidance change.

Got it thanks, so much.

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

Great.

My first question is on gross margin you gave a lot of detail on the changes to your sales outlook, but hoping to get some color on gross margin question with beginning to show some sequential progress and assuming you continue to see that sequential progress.

Should we expect it to turn positive in second half.

It a fair assumption and if so could you talk about some of the drivers of that.

Better underlying that thank you.

We are very confident that second half gross margin will be several hundreds of basis points higher.

Then where we were in the first half probably three to 400.

Which is quite important because we're still dealing with a lot of the after effects of inflation inflation in the first half of year is probably running around 400 basis points of the negative in the second half, we think it'll be more like a 100 basis points of compression because of inflation itself. The other thing that we're doing that we talked about in the past with DC consolidation work, where we're going to be going from effectively call. It one.

One 9 million square feet is paid down to maybe one five the network might go from your <unk> down to something more like 'twenty, we talked about in the script. The fact that we have just recently got a four wall cost assessment.

That will save on an annualized basis over $50 million by getting after over overheads in plant overhead and indirect operational elements along with some direct shifting crews and Theres just a whole range of other things on the AE side that we're also getting after so we feel like the productivity program is only gaining strength and that's one of the reasons we feel good about gross margins also.

There's a lot of other things at play like the pricing effect that we just put in 471, which will bring a bunch of additional pricing into the second half. So we feel very good about where we are with gross margin I think as you know we've had a gross margin compression every year since the Jarden acquisition and this is the year that we're hoping to turn that around.

Got it thanks, and then given your updated views on resource allocation across brands and categories and geography.

Can you give us some idea on whether there are brands that are.

So are you seeing more spend rather than Latin and the level of divergence.

Youre expecting versus where it currently stands on the brands that are going to see.

Less support.

Sure.

Yes, we are or as part of our plan, but we are spending.

More money on A&P, so the A&P spend that we planned in the back half of the year is up versus last year and significantly up versus the front half of this year and it is disproportionately focused on our leading brands.

So for example, we.

And part of the reason, we feel very good about the back to school period, which were just entering.

At our customer service results have improved markedly as Mark mentioned from our fill rates in the low eighties to fill rates in the mid to high <unk> on the writing business. We've had a terrific sell in and back to school the writing business. Despite the core sales for the company being down in Q2, the writing business was up and.

Q2, non core sales our share of retailer assets.

<unk> has improved this year versus prior year.

But we believe that's a good use of of investment dollars at the same time.

We said when we rolled out the strategy that we have 80 master brands and there is 25 that represent.

Thank you.

Yes.

Thank you and our next question coming from the lineup.

<unk> with Jpmorgan Your line is open.

Thank you I wanted to go back to what you just said to <unk> question on the 55 branch Chris.

And of course this company has been through a huge transformation.

And kind of optimizing.

And you're selling brands and doing all of that image.

Kind of deleveraging that you went through I wonder if there is any thoughts to be made on some of those brands being divested.

And <unk> just one of them.

Think about like what does this sound like some of the as you go through days or is it something that youre going to be a SaaS post all of this transformation process that this product that this project is steel.

Giving you and starting to give you this year.

Then on your comment and just a clarification on your comment about back to school of course, you Havent seen consumption Ian.

Is this category also going through in your view some of the reductions that.

That the retailers have been growing through floor.

For inventory or does this pretty much more immune and given that this still is it still positive impacts from reopening and office and all of that thank you.

I think we.

We are trying to take a middle of the road view on that but we're very confident that we're set up.

Very well to gain market share during the period on the 55 brand question.

That represent 10% of the company's sales and profits I would put those 55 brands into three buckets. The largest bucket of the 55 brands that we are going to continue to sell but we are just are going to.

<unk>.

Support less so to speak in terms of innovation resources we.

We will continue to support them fully in terms of sales resources, but we think our innovation resources. Our A&P dollars are better spent on the top 25, then this other category so consider that sort of a.

Our milk type column, if you will for those brands, there's a second category of brands.

We are going to proactively look to discontinue.

And these are brands that represent a very small percent of the company's revenues and profits and frankly are a distraction and we believe we're better off just de listing them because we don't believe they're saleable. We don't believe there are significant and we don't.

We don't think it's worth it to even go through the effort of trying to sell them. So there'll be some brands in that category.

And then there's a third category, where we're going to look to do something different and that could be a divestiture or a licensing type opportunity that will be a small subset I don't think youre going to see massive change like we've had in the past from an M&A divestiture standpoint that is <unk>.

Not our strategy.

And Chris just a follow up on that.

So thinking about the 10% headwind that eventually we're going to see happening of course, we don't know the size the size of each of the buckets that you just described.

But assuming that there is slight call it mid single digit.

Potential headwind if you were.

Just simply to list some of these two guys tackling bucket or.

Potentially sell like is that something that we should worry about into 2024.

That could be a headwind or do you are going to manage these gradually.

Thank you.

Thank you and our next question coming from the line of Dana from with UBS. Your line is open.

Thanks, operator, and good morning, everyone. So.

Thank you so much for the color on the building blocks of our guidance. This year, but I was just hoping to understand the implied ramp in the fourth quarter just in terms of operating margin.

The outlook by several hundred basis points of operating margin expansion. So.

You sounded quite optimistic on gross margin. So can you just unpack that or whats implied in the fourth quarter of it and then.

Thanks.

All of these process improvements that data and technology enhancements.

And then on the E&P side, you heard Chris mentioned it earlier, we're actually going to probably be spending 50% more in the second half than we spent on the first of all we have compelling consumer proposition and if we think about the question that was asked earlier about the new smaller brands, maybe being a drag on the business that might be true in part, but we believe the focus that can be put against the top 25 brands and the additional resources that go against.

Those will more than offset that as we really start to accelerate.

Top line.

Inflation is still going to be moderate to high or somebody some level of destocking I think the mild recession that we were concerned about it maybe less relevant now it seems like maybe we will avoid that which would be a good thing, but during that time really fronting.

Dollars towards the capability build out that we've spoken to and doing the brand rationalization effort. So we had said that the core sales will be below our evergreen targets. We think thats true, we said free cash flow productivity will be at or above in this year. We're targeting over 100 now based on the good work that's being done and then we said that the operating margin expansion at the evergreen target, which is roughly 50 basis points.

<unk> the bottom line progression on margin with additional A&P investments that we choose to make in order to put more marketing support behind our top brands.

It is going to be a balanced approach going forward, we feel really good about where we are if you look sequentially across every element of the P&L is playing out the way that we would have hoped.

No that's super helpful. And then Chris I just had a question.

On visibility.

The second straight quarter here, and where things are moving a bit lower particularly around the core sales.

You've historically been very prudent so I guess I'll just as visibility improves.

To the point, where you feel like you can kind.

I'll get back to that conservatism, if you will and the outlook. So that we don't really see another call down or does it still remain.

A bit murky.

Yes, what I would say that visibility is it is a challenging visibility period, primarily because we're dealing with.

The normalization from from a once in a lifetime pandemic.

Covid, we're dealing with this massive inflation, that's starting to come down and the impact that's having on consumer purchases were dealing with retailer.

Patterns on inventory that that are unusual in nature as a result.

The visibility is getting better I will say that we were encouraged that we came in right.

Right in the middle of our topline guidance range for Q2 on core sales growth. So we hit the mark on the on the Q2 guidance obviously the further out you go.

The more challenging it is to provide top line guidance.

The thing that we're focused on is.

Is what's in our control.

And we are moving at pace on the capability investments.

Have.

<unk> brought in new talent.

<unk> brand management and innovation.

A new head of consumer insights.

We've changed out leadership in the outdoor <unk> recreation.

Segment.

It will play out over the next 12 months to 18 months they are not going to happen immediately because these things take some amount of time.

But when we the thing that we're excited about is as we begin to make those improvements when you couple that with a.

A very high performing supply chain and back office organization Thats delivering record.

Cost takeout levels, we're very optimistic about where we can take this business over the next couple of years.

Okay.

Thanks, So much I'll pass it on.

Thank you and our next question coming from the lineup.

Liberman with Barclays. Your line is open.

Great. Thanks, good morning.

I know it might seem crazy to want to look.

We further out at this point, but.

I guess I was just curious you guys had talked about evergreen 50 basis points on average margin expansion, but what about the conversation kind of longer term.

P&L benchmarking because I understand unequivocally the opportunity that could be ahead in terms of positive operating leverage with all the structural cost take out that youre doing getting to a more stable and stronger and predictable top line.

And I'm, just kind of not sure how to think about the reinvestment and capabilities as well.

And so even like if I look at my numbers right now.

If I look at general expense like should I be thinking about 'twenty four is kind of reaching a benchmark level of proper.

Investment in the business.

And that you are making that step change this year or I guess over a four quarter period, probably or does that keep building. So just anything you can offer on maybe longer term benchmarking on structure of the P&L would be helpful. If you're willing to go there.

Yes.

Try to provide a little bit of help.

So let me start with.

With 24.

I think in 24 or.

We're likely to have we've got a number of things that are effectively onetime in nature in 'twenty three that should allow 24 to be a bit of a bounce back year in terms of operating margin. So.

I'll just give you a few of them.

Inflation, which was.

Is significant particularly in the first half of this year largely because of capitalized variances that are rolling off should be behind us.

And as a result based on what we're seeing today, we expect inflation to be a much smaller number in 'twenty four than it was in 'twenty. Three we also expect fixed cost absorption to be a materially smaller impact in 'twenty four 'twenty three because recall that this year we're dealing.

With the revenue decline plus we're taking inventory down on top of that and so.

That fixed cost absorption number is somewhat one time in nature. We also mentioned that our productivity is ramping up and we've got a very strong funnel.

That we believe is going to continue to drive very strong productivity next year.

In addition to that this year as we're reducing inventory.

We are being aggressive on what we call excess and obsolete inventory. So that we end the year with a clean inventory level on some of that excess and obsolete inventory we are.

Liquidating at a discount that that we don't think we'll have to do as we head into next year as we've gotten our inventory levels better and then obviously the retailer inventory destocking is somewhat onetime in nature and so all of those things would tell you that.

24, we should.

Having above algorithm year certainly.

On margins and.

And that's what we're shooting for.

I don't believe that 'twenty four is the end of the margin story, though I think we have a significant opportunity going forward to continue to build operating margins.

For the next really three to five years.

Cause a lot of the front facing capability that we're putting in place.

Also in addition to getting topline growth going going to get margin going because when you develop.

Category driving innovation.

That is focused on large leading brands that is targeted for the MTP and <unk> segments, which our strategy calls for those tend to be gross margin accretive initiatives and that is our strategy and so as we put this.

Consumer facing capability in place, we believe that our innovation pipeline will get stronger we believe the innovation pipeline will lead to.

Better category growth better market share gains and gross margin improvement from a mix standpoint.

And so.

All of those things have us.

Confident that the longer term margin opportunity in this business is significantly higher than where we are today and Lori if I could add just one point that I think is relevant.

The gross margin right around 30% in Q2, we talked about the fact that the second half is going to be considerably stronger for the reasons that Chris just reiterated so our exit rate will be several hundred basis points beyond that and that's when we're still operating 46 manufacturing sites with capacity utilization frankly, now given where we are probably in the low thirties now.

90% of which are single sourced and many of which are in the right geographic locations to really optimize the global supply chain. So we think we have tremendous opportunity.

On the cost takeout side as well as all the innovation that we brought forward there'll be more MTP HCP.

Sure.

Okay. Thank you. Thanks, so much I was really comprehensive I appreciate it.

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

Thanks, Thanks very much.

So.

Okay.

You just you just articulated mix makes good sense to me and it was exciting.

Wanted to kind of.

Circle it back to Peter.

Peter was asking about in terms of the.

The commentary.

A few months ago about the next 12 to 18 months not being a straight line.

Yes, Chris Martin just described about.

Exiting 'twenty three and then the <unk>.

Back here in 'twenty, four seems to run counter to that.

Next 12 months to 18 months being a lot more a lot more grounded.

Maybe it's just a.

And kind of macro assumptions, but just seems like a very very different message as to how we think about.

Back half of 'twenty, three and 'twenty four.

Grounded.

June commentary versus grounded in your recent commentary. So if we can just square that circle for me.

Yes, I think.

If you step back I think that.

Work.

We're trying to.

Drive significant capability.

Improvement in a turnaround situation.

That the company is in a tough macro context that is hard to predict.

And when you put those things together and you say the macro.

Environment currently as a headwind, we think it's going to turn to a tailwind or at least moderate but it's hard to predict exactly when that's going to happen.

We know that we're on the right track from the strategy that we have just deployed.

Six weeks ago, but we also know that it's going to take time to drive these capability improvements because they.

We're saying that cash is going to be our top priority and it's going to be.

Moving forward above our target and this year, we're going to be probably be a 100% free cash flow productivity.

And we are better and then the operating margin expansion is going to continue in part because the gross margin to take out so big and so extreme and we're very confident that is going to come to pass I mean, so we feel like over the next 12 to 18 months sales might be a real challenge, but margin will progress and cash will be our focus.

Okay. Okay. Okay.

And I guess is there is there.

As part of the strategy.

A lot of.

Top line accelerators over the course of time.

Margin expansion drivers.

Okay.

I guess.

Maybe at this point is there kind of a.

Like a time order prioritization of where you think it's kind of more of the low hanging fruit is versus more of the kind of longer term aspirational elements about but then as we go forward you can state we will.

Can you take some kind of scorecard against against those we can track progress or how are you thinking about.

Both achieving achieving them and also kind of communicating your progress as we go.

Yes, I think I think it's a good thought and we.

We obviously have an internal scorecard, that's very detailed that we have just sort of put together. So once we finalize the strategy.

We effectively chartered capability improvement projects with clear kpis owners timelines against each of them.

And we are pursuing all of them simultaneously.

Have different timelines relative to the execution, so the consumer and customer understanding capability improvement plan and timeline for example looks different than creating a brand management organization timeline.

And.

So we will endeavor to provide.

Some more clarity on that.

As we go forward I think we're.

At the place where we've commissioned all the projects we have owners, we have timelines we have a clear plan.

And.

And we're off and running we're not delaying on any project, which is why I mentioned in the prepared remarks that the pace of change at the company.

Is accelerating dramatically because we're taking on a lot in terms of capability improvements.

The last thing I would say is that.

If you if you were to raise how difficult is it to do these capability improvements.

Typically when you think about capability improvement oftentimes people think about changing the people the process and or the technology.

Fuel productivity program, the SKU count et cetera, all of US all of that has gone well that actually is harder to do than what we're talking about on the front end.

So we have chartered the projects and the owners on aggressive timelines to begin to make.

<unk>.

Okay. Thank you very much.

Okay.

Thank you.

And our last question comes from the line of <unk> <unk>.

<unk> from Citi. Your line is open.

Hey, good morning, everyone.

We cover a lot of ground I, just wanted to and maybe Chris you clearly announced a lot of the strategic changes coming on.

More recent changes on the front end.

The kind of the restructuring programs change in capital allocation.

Other areas, where you think like there is more focus on your end in terms of potential further changes in the organization that we should be thinking about.

Our focus now is shifting to drive that strategy into execution.

And rather than sort of debate the strategy at this point, we think we've got the right strategy and.

Our strategy doesn't really come to life unless you executed at the point of attack and we need to drive that strategy and execution and that takes time, because you have to communicate it.

To the segments <unk> got to communicate it to the geographies you have to communicate it to the functions you have got to make sure that azure cascading that strategy throughout the organization that ultimately gets into every individuals.

Work plan and as you do that you begin to change the trajectory in the direction of the enterprise and so.

Don't expect that were going to have significant.

Changes in.

And strategy at this point I expect what Youre going to hear US talk more about is our progress in driving the strategy into action and execution.

Great. Thank you that's helpful.

Yes.

Thank you.

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 Dot you O'brien stock.

<unk> Com you may now disconnect everyone have a great day.

Q2 2023 Newell Brands Inc Earnings Call

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