Q3 2023 Newell Brands Inc Earnings Call
Okay.
Good morning, and welcome to Newell Brands' third 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 questions.
To stay within the time scheduled for the call. Please limit yourself to one question during the Q&A session.
Today's conference call is being recorded.
A live webcast of this call is available at IR Dot and all brands dotcom.
I'll now turn the call over to Sophie Your Cintas, Vice President of Investor Relations Ms. <unk> you may begin.
Thank you good morning, everyone and welcome to L brands third quarter earnings call on the call with me today are Chris Peterson, our president and CEO and Mark our second our CFO before we begin I'd like to inform you that during the course of today's call, we will be making forward looking statements, which involve risks and uncertainty actual results and outcomes may differ.
Materially and we undertake no obligation to update forward looking statements I refer you to the cautionary language and risk factors are available in our earnings release, our Form 10-K Form 10-Q, and other SEC filings available on our Investor Relations website for further discussion of the factors affecting forward looking statements.
Please also recognize that today's remarks will refer to certain non-GAAP financial measures.
Those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP explanations of these non-GAAP measures and available to consolidations between GAAP and non-GAAP measures can be found in today's earnings release and tables that they were furnished to the SEC.
And now I will turn the call over to Chris. Thank.
Thank you Sarah.
Good morning, everyone and welcome to our third quarter call we.
We had mixed results in the third quarter, we made significant progress delivering against the five major priorities. We established at the start of the year as well as deploying and Actioning the new integrated corporate strategy at the same time, we were disappointed core sales declined nine 2% during the quarter.
We take these each in turn starting with the five priorities, we laid out at the start of the year.
First year to date, we delivered excellent results on operating cash flow, which improved more than $1 $2 billion versus last year, largely due to significant progress on inventory reduction.
The stronger than anticipated performance, thus far has given us confidence to raise our outlook on cash flow for the full year.
Second during the third quarter gross margin reached an inflection point, expanding 170 basis points year over year with the fuel productivity program, along with pricing serving as the driving force. We continue to expect record productivity savings in 2023 with year over year gross margin improvement continuing.
Into the fourth quarter.
Third we completed the project Phoenix organization design changes with all markets moving to the one novel approach. We are on track to realize $140 million to $160 million of pre tax savings this year and $220 million to $250 million on an annualized basis.
Fourth we are moving at pace with the simplification and SKU count reduction work across the organization and are on track to end the year with less than 25000, Skus down from about 28000 last year and over 100000 at the end of 2018.
Finally, the new operating model with three segments, our centralized manufacturing and supply chain and a one neural approach with our top four customers and across the geographies is now fully in place and starting to pay dividends the.
The most concrete example of how we're already creating and leveraging scale under our normal approach as the difficult but necessary actions taken during the third quarter to right size the manufacturing labor force across selected sites.
Those actions, which would have not been possible previously due to the way Noel was organized are expected to yield about $50 million in annualized cost savings.
The challenging macroeconomic background continued to weigh on Newell's topline during the third quarter, reflecting soft demand for discretionary and durable products amidst persistent inflation on everyday goods normalization in category trends post COVID-19 tight inventory management by retailers as well as the <unk>.
Operator: Good morning, and welcome to Newell Brands' third 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 questions.
Operator: In order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. Today's conference call is being recorded. A live webcast of this call is available at ir.newellbrands.com.
Unfavorable impact from the bankruptcy of bed Bath <unk> beyond.
We estimate that about 80% of the sales decline was driven by category declines and retailer inventory actions power.
However, there was a meaningful portion of our sales compression that traces back to gaps in our front end consumer facing capabilities or was the direct result of the July 1st pricing actions, we took to proactively address situations, where our structural economics were untenable.
Sofya Tsinis: I will now turn the call over to Sofya Tsinis, Vice President of Investor Relations. Miss Tsinis, you may begin. Thank you.
Sofya Tsinis: Good morning, everyone. Welcome to Newell Brands' third quarter earnings call.
That is why since my appointment in May we have placed so much emphasis on developing a robust set of corporate business unit functional and brand specific strategies all of which were fully informed by our brutally honest capability assessment to guide our approach in the years ahead.
Sofya Tsinis: On the call with me today at Chris Peterson, our President and CEO, and Mark Erceg, RCSL. Before we begin, I'd like to inform you that during the course of today's call, we will be making forward-looking statements which involve risks and uncertainty. Actual results and outcomes may differ materially and we undertake no obligation to apply to our state forward-looking statements.
At its core our new strategy focuses on improving the company's consumer facing capabilities, while distorting investment to our top 25 brands in top 10 markets and building on the strengthened operational and organizational foundation, we have built over the past several years.
Sofya Tsinis: I refer you to the cautionary language and risk factors available in our earnings release, our Form 10K, Form 10Q, and other SEC filings available in 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-GAF financial measures, including those we refer to as normalized measures. We believe these non-GAF measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAF. Explanations of these non-GAF measures and available with consultations between GAF and non-GAF measures can be found in today's earnings release and tables that they were furnished to the SEC.
Following the deployment of our new strategy in June we've taken decisive actions to bring the new strategy to life in several ways.
To put consumer understanding and insights at the center of everything we do we have reinvented the consumer insight function and overhauled news innovation process around a biannual review process. This new process has been established to identify strong consumer driven propositions on our top 25 brands.
Sofya Tsinis: Thank you, and I'll turn the call over to Chris. Thank you, Sophia.
Christopher Peterson: Good morning, everyone, and welcome to our third quarter call. We had mixed results in the third quarter. We made significant progress delivering against the five major priorities we established at the start of the year, as well as deploying and actioning the new integrated corporate strategy. The same time, we were disappointed core sales declined 9.2% during the quarter. Let me take these each in turn, starting with the five priorities we laid out at the start of the year.
With a focus on creating fewer bigger and longer and longer lasting innovations that our gross margin accretive as part of a comprehensive tiered product launch system designed to get consumer relevant innovation into market faster consistent.
Consistent with this and to ensure we are being choice full and driving the strategy and the execution. We are taking swift action relative to the exit of smaller non core brands. We are moving at pace and expect to finish the year with a tighter more focused brand portfolio comprised of about 60 master brands versus 80 at the start of this.
Christopher Peterson: First, year to date, we delivered excellent results on operating cash flow, which improved more than $1.2 billion versus last year, largely due to significant progress on inventory reduction. The stronger than anticipated performance thus far has given us confidence to raise our outlook on cash flow for the full year. Second, during the third quarter, Gross Margin reached an inflection point, expanding 170 basis points year over year, with the fuel productivity program along with pricing serving as the driving force.
Year.
Second to dramatically improve brand building and brand communication and as we strive to build brand management into a foundational capability, we replaced close to half of Newell's brand managers over the past several months and put exceptional performance standards in place, which set clear kpis driven.
<unk> for all brand managers going forward. In addition, we recently implemented important changes to the process and structure of our marketing and digital organizations to unlock quicker decision, making drive accountability and improve our ability to drive stronger purchase intent across our top 25 brands.
Christopher Peterson: We continue to expect record productivity savings in 2023, with year over year, Gross Margin improvement continuing into the fourth quarter. Third, we've completed the project Phoenix organization design changes with all markets moving to the one new approach. We are on track to realize 140 to $160 million of pre-tax savings this year, and 220 to 250 million on an annualized basis. Fourth, we are moving at pace with the simplification and skew count reduction work across the organization, and are on track to end the year with less than 25,000 skews, down from about 28,000 last year and over 100,000 at the end of 2018.
Third key members of normal sales team has been tasked with leading new business development, where they will leverage newell's scale and extensive portfolio of leading brands to identify and pursue incremental distribution opportunities with it within new accounts.
While the bulk of our selling resources will continue to maintain their focus on strengthening our partnerships and increasing distribution with existing customers.
Finally to properly Cascade <unk> integrated set of corporate where to play and how to win choices along with the new segment function in top 25 brand strategies key members of the leadership team and I have now visited eight of Newell's top 10 countries across North America, Europe, and Latin America.
Christopher Peterson: Finally, the new operating model with three segments, a centralized manufacturing and supply chain, and a one-nual approach with our top four customers and across the geographies is now fully in place in starting to pay dividends. The most concrete example of how we are already creating and leveraging scale under a one-nual approach is the difficult but necessary actions taken during the third quarter to right size the manufacturing labor force across selected sites.
Based in part on those interactions we have decided to bring in new strong talent to fill a crucial roles across several of google's businesses and geographies.
For example, we recently hired new leaders for the home fragrance and kitchen businesses as well as new heads of Europe and France.
Christopher Peterson: Those actions which would have not been possible previously due to the way Newell was organized are expected to yield about 50 million in annualized cost savings. The challenging macroeconomic background continued to weigh a Newell's top line during the third quarter, reflecting soft demand for discretionary and durable products amidst persistent inflation on everyday goods, normalization and category transposed COVID, tight inventory management by retailers, as well as the unfavorable impact from the bankruptcy of bedbath and beyond.
Before turning the call over to Mark I'd like to provide a little perspective on the back to school season since Thats always an area of interest.
While predictions for the back to school season varied widely across the industry in aggregate the categories, where newell competes declined modestly with stronger market performance from retailers that put their support behind leading brands versus those that focused on private label offerings.
This backdrop several of our major brands such as Sharpie Expo grew market share, which we were excited to see that said gaining share in a down market is not a prescription for long term success.
Christopher Peterson: We estimated about 80% of the sales decline was driven by category declines and retailer inventory actions. However, there was a meaningful portion of our sales compression that traces back to gaps in our front-end consumer facing capabilities, or was the direct result of the July 1st pricing actions we took to proactively address situations where our structural economics were untenable. That is why, since my appointment in May, we have placed so much emphasis on developing a robust set of corporate business unit functional and brand specific strategies, all of which were fully informed by our brutally honest capability assessment to guide our approach in the years ahead.
That's why we are already incorporating the learnings from this season.
Most important of which is the role of our leading brands can play in driving category growth into next year's back to school plans with leading retailers.
While there are parts of Knowles portfolio, where we are gaining share that's not the case broadly this highlights why we needed to make a major pivot in the Companys front end strategy.
While we are dissatisfied with our current sales performance, we did say at the Deutsche Bank Conference in June that we expected our top line performance to be below our evergreen target of low single digits for the next four to six quarters.
Christopher Peterson: At its core, our new strategy focuses on improving the company's consumer facing capabilities while distorting investment to our top 25 brands in top 10 markets and building on the strengthened operational and organizational foundation we have built over the past several years. Following the deployment of our new strategy in June, we've taken decisive actions to bring the new strategy to life in several ways. First, to put consumer understanding and insights at the center of everything we do, we've reinvented the consumer insight function and overhauled new innovation process around a bi-annual review process.
Beyond that and as the bulk of our new capabilities ramp up we remain fully committed to returning the company to topline growth.
Back in June and during our last earnings call. We also reiterated that our top financial priorities for 2023 or strengthening cash flow and improving gross margin and very good progress is being made on both of those fronts.
So while there are certainly much more work to do ahead of US. The strategy is starting to take shape. That's why we are confident that this year free cash flow productivity will exceed our evergreen target of about 90% and the business will continue to improve sequentially next year as measured by gross margin expansion and the number of top 20.
Christopher Peterson: This new process has been established to identify strong consumer driven propositions on our top 25 brands with a focus on creating fewer, bigger, and longer lasting innovations that are gross margin accreted. As part of a comprehensive, peered product law system designed to get consumer relevant innovation into market faster, consistent with this and to ensure we are being choiceful and driving the strategy and execution. We are taking swift action relative to the exit of smaller non-core brands.
Five brands growing market share as.
As we operate operationalize and execute our new strategy to significantly improve our financial performance. We have been laser focused on implementing the organizational operational and cultural changes required to strengthen the company's front end consumer facing capabilities, while harnessing the scale and power of one north.
Christopher Peterson: We are moving at pace and expect to finish the year with a tighter, more focused brand portfolio comprised of about 60 master brands versus 80 at the start of this year. Second, to dramatically improve brand building and brand communication, and as we strive to build brand management into a foundational capability, we replace close to half of rules brand managers over the past several months and put exceptional performance standards in place, which set clear KPI driven expectations for all brand managers going forward.
While the path forward will not be a straight line, we remain confident Newell's financial performance will improve and significant value will be created over time for our stakeholders.
I would like to thank our leaders and employees for their hard work perseverance and dedication amidst significant organization changes and for their unwavering commitment to our purpose of delighting consumers by lighting up everyday moments I'll now hand, the call over to Mark. Thanks, Chris Good morning, everyone third quarter net sales and <unk>.
Core sales both declined approximately 9% largely due to the same macroeconomic headwinds we've been wrestling with since the third quarter of last year. However.
Christopher Peterson: In addition, we recently implemented important changes to the process and structure of our marketing and digital organizations to unlock quicker decision making, drive accountability and improve our ability to drive stronger purchasing time across our top 25 brand. Third, key members of NULLE sales team have been tasked with leading new business development where they will leverage NULLE scale and extensive portfolio of leading brands to identify and pursue incremental distribution opportunities within new accounts.
However on a more positive note, we continued to make significant progress improving the structural economics of the business during Q3 with Newell's normalized gross margin, improving 170 basis points versus last year, and 140 basis points sequentially to 31, 3%.
A 500 basis point contribution from fuel productivity savings and meaningful pricing actions taken across roughly 30% of our U S business, primarily in the home and commercial space more than offset the significant headwinds from inflation and fixed cost absorption.
Christopher Peterson: While the bulk of our selling resources will continue to maintain their focus on strengthening our partnerships and increasing distribution with existing customers. Finally, to properly cascade NULLE's integrated set of corporate where to play and how to win choices, along with the new segment function and top 25 brand strategies, key members of the leadership team and I have now visited eight of NULLE's top 10 countries across North America, Europe, and Latin America.
Despite excellent productivity work by the team as well as strong savings from project, Phoenix, which amounted to $49 million in the quarter normalized operating margin contracted 220 basis points versus last year to eight 2%.
Most of the contraction in third quarter normalized operating margin was driven by higher incentive compensation charges. As you may recall incentive compensation was revised sharply lower during Q3 last year, making current period comparisons very difficult.
Christopher Peterson: Based in part on those interactions, we have decided to bring in new strong talent to fill crucial roles across several of NULLE's businesses and geographies. For example, we recently hired new leaders for the home fragrance and kitchen businesses, as well as new heads of Europe and France.
During the third quarter net interest expense increased $12 million versus last year to $69 million due solely to higher interest rates to get net debt was down nearly $500 million year over year and down nearly $400 million a year to date.
Christopher Peterson: Before turning the call over to Mark, I'd like to provide a little perspective on the back-to-school season since that's always an area of interest. While predictions for the back-to-school season varied widely across the industry, in aggregate, the categories where NULLE competes declined modestly with stronger market performance from retailers that put their support behind. Leading brand versus those that focused on private label offerings against this backdrop several of our major brands such as Sharpie and Expo grew market share, which we were excited to see.
The discrete tax benefit originally expected in the fourth quarter was captured in the third quarter, yielding a normalized tax benefit of $73 million, which in combination with the other elements. We just went over brought normalized diluted earnings per share in at 39.
And drove a significant upside and normalized earnings per share relative to the 20% to 20% outlook previously provided.
Turning to operating cash flow strong progress on inventory management allowed us to generate $679 million of positive operating cash flow year to date through the third quarter.
Christopher Peterson: That said, gaining share in a down market is not a prescription for long-term success. That's why we are already incorporating the learnings from this season. The most important of which is the role our leading brands can play in driving category growth in the next years back-to-school plans with leading retailers. While there are parts of NULLE's portfolio where we are gaining share, that's not the case broadly. This highlights why we needed to make a major pivot in the company's front-end strategy.
This represents considerable improvement versus a $567 million use of cash during the same period last year.
Therefore through the first nine months of 2023 operating cash flow increased more than $1 $2 billion, which is a remarkable achievement that Chris and I wanted to thank Newell extended planning sourcing and production teams for delivering.
Christopher Peterson: While we are dissatisfied with our current sales performance, we did say at the Deutsche Bank Conference in June that we expected our top-line performance to be below our evergreen target of low single digits for the next four to six quarters. Beyond that, and as the bulk of our new capabilities ramp up, we remain fully committed to returning the company to top-line growth. Back in June and during our last earnings call, we also reiterated that our top financial priorities for 2023 were strengthening cash flow and improving gross margin, and very good progress is being made on both of those fronts.
As anticipated the company's leverage peaked at six three times at the end of Q2 before improving sequentially and ending the third quarter at six one times where.
We are exceeding our cash flow projections and paying down debt and expect additional improvement in the leverage ratio in Q4.
Longer term, we remain committed to achieving investment grade status and continue to target a leverage ratio of about two five times.
Looking out over the remainder of the year, we've assumed the following fourth quarter net sales in the range of $1 96 to $2 3 billion.
As net sales and core sales are both expected to decline, 14% to 11% versus last year.
Christopher Peterson: So while there are certainly much more work to do ahead of us, the strategy is starting to take shape. That's why we are confident that this year, free cash flow productivity will exceed our evergreen target of about 90%. And the business will continue to improve sequentially next year, as measured by gross margin expansion and the number of top 25 brands growing market share. As we operationalize and execute our new strategy to significantly improve our financial performance, we have been laser focused on implementing the organizational operational and cultural changes required to strengthen the company's front-end consumer-facing capabilities while harnessing the scale and power of one null. While the path forward will not be a straight line, we remain confident, null financial performance will improve and significant value will be created over time for our stakeholders.
Gross margin is expected to be demonstrably higher than the fourth quarter of last year due to the targeted interventions we've made to improve the structural economics of the business.
SG&A expense relative to last year is expected to be down in dollar terms driven by project Fenix savings and discretionary spend control, but SG&A as a percentage of sales should increase due to lower and to a much lesser extent from the capabilities that we've invested in and consumer and customer understanding revenue growth management data analytics and retail execution.
Among others.
Putting all this together fourth quarter normalized operating margin is forecasted to be in the range of seven 8% to eight 8%, which represents a 290 to 390 basis point improvement versus last year at.
As such Q4 is expected to market important turning point in the company's operating profit, which at the midpoint of the range is forecasted to grow nearly 50% versus last year.
Christopher Peterson: I would like to thank our leaders and employees for their hard work, perseverance, and dedication amid significant organization changes and for their unwavering commitment to our purpose of the lighting consumers by lighting up every day moments.
Finally for the fourth quarter, we forecast interest expense to be higher year over year, a tax rate in the high teens and normalized earnings per share in the range of 15 to 20.
Mark Erceg: I'll now hand the call over to Mark. Thanks, Chris.
Mark Erceg: Good morning, everyone. Third quarter net sales and core sales both decline to approximately 9% largely due to the same macroeconomic headwinds we've been wrestling with since the third quarter of last year. However, on a more positive note, we continue to make significant progress improving the structural economics of the business during Q3, with new rules normalized gross margin improving 170 basis points versus last year. And 140 basis points sequentially to 31.3%. A 500 basis point contribution from fuel productivity savings and meaningful pricing actions taken across roughly 30% of our US business, primarily in the home and commercial space, more than offset the significant headwinds from inflation and fixed cost absorption.
For the full year, we expect net sales in the range of $8 <unk> to $8 9 billion.
Largely driven by a core sales decline of about 13%.
Normalized operating margin is expected to be 7% to seven 3% as we reflect the negative top line flow through and capability investments discussed earlier.
Interest expense is forecasted to be up significantly versus last year with a normalized tax benefit in the teens, reflecting the sizable tax benefit that was realized in the third quarter.
Normalized diluted earnings per share are now forecasted in the 72% to 77% range.
At the start of the year, we said cash generation was our number one priority. So we're very pleased that based on our strong year to date performance. We can confidently raised our cash flow outlook for the year, even if top line expectations and earnings per share estimates have been temporary.
Mark Erceg: Just by excellent productivity work by the team, as well as strong savings from Project Phoenix, which amounted to $49 million in the quarter, normalized operating margin contracted 220 basis points versus last year to 8.2%. Most of the contraction in third quarter normalized operating margin was driven by higher incentive compensation charges. As you may recall, incentive compensation was revised sharply lower during two, three last year, making current period comparisons very difficult. During the third quarter net interest expense increased $12 million versus last year to $69 million, due solely to higher interest rates to get net debt with down nearly $500 million year over year and down nearly $400 million year to date.
We now expect to generate operating cash flow of $800 million to $900 million.
Inclusive of $95 million to $120 million of cash payments related to the project Phoenix, which as Chris indicated is on track for $140 million to $160 million of pre tax savings this year.
At the midpoint of our outlook operating cash flow improved by more than $1 $1 billion year over year with free cash flow productivity expected to be well north of 100%.
With the caveat that next year's planning process is still in its very early stages, we thought it might be helpful to provide some high level conceptual thoughts.
So with that understanding meaningful improvement in the top line run rate is expected on a sequential basis. However, 2024 core sales are still expected to be down as macroeconomic challenges persist and front end capabilities are still being rebuilt.
Mark Erceg: The discrete tax benefit originally expected in the fourth quarter was captured in the third quarter. You'll be a normalized tax benefit of $73 million, which in combination with the other elements, we just went over, brought normalized eluded earnings per share in at $0.39 and drove the significant upside in normalized earnings per share relative to the 20 to 20% outlook previously provided. Turning to operating cash flow, strong progress on inventory management allowed us to generate $679 million a positive operating cash flow year to date through the third quarter.
Please note that this preliminary sales commentary is consistent with comments provided at the Deutsche Bank Conference in June where we stated core sales growth is expected to be below the evergreen target of low single digit growth over the next 12 to 18 months.
Currency based on current spot rates in combination with planned brand exits my collectively lowered net sales by an additional two to three points.
Mark Erceg: This represents considerable improvement versus a $567 million use of cash during the same period last year. Therefore, through the first nine months of 2023, operating cash will increase more than $1.2 billion, which is a remarkable achievement that Chris and I want to thank new old extended planning, sourcing and production teams for delivering. As anticipated, to come these leverage peaks at 6.3 times at the end of Q2 before improving sequentially and ending the third quarter at 6.1 times, we are exceeding our cash flow projections and paying down debt and expect additional improvement in the leverage ratio in Q4. Long return, we remain committed to achieving investment grade status and continue to target a leverage ratio of about 2.5 times.
Importantly, we expect strong gross margin improvement next year fueled by productivity savings carryover pricing benefits less excess and obsolete charges and better product mix, which should allow operating margin to expand head of the 50 basis points evergreen target, even as we continue to invest behind front end capabilities.
Interest expense should be slightly higher in 2024 and at this point, we are planning for a normalized effective tax rate of about 17%, which would represent a significant year over year headwind to earnings per share.
As for cash we will provide more context once we're further along in our planning process, but in the meantime, suffice it to say cash will remain a major focus area for us.
In closing there are two key takeaways from today's call.
Mark Erceg: Looking out over the remainder of the year, we assume the following is a fourth quarter. Netfail in the range of $1.96 to $2.03 billion as netfails and core sales are both expected to decline 14 to 11% versus last year. Gross margin is expected to be demonstrably higher than the fourth quarter last year due to the targeted interventions we have made to improve the structural economics of the business. SGA expense relative to last year is expected to be down in dollar terms due to by project Phoenix savings and discretionary spend control.
First we are making strong progress on the deployment of our new integrated set of corporate business unit functional and brand strategies, all of which were heavily informed by a comprehensive companywide capability assessment. We now have for the first time in a long time, very clear where to play and how to win choices that the major pivot in our front end consumer.
We are facing capabilities will allow us to successfully pursue.
Second Newell is delivering against the two key financial priorities gross margin and cash flow that were established for 2023, even though macro driven pressures are greater than previously anticipated.
Mark Erceg: But SGA, if it percentage of fails, should increase due to lower and to a much lesser expense in the capability that we have invested in in consumer and customer understanding, revenue growth management, data analytics, and retail execution among others. Putting all this together, fourth quarter, an organized operating margin is forecasted to be in the range of 7.8 to 8.8%, which represents a 290 to 390 basis point improvement versus last year. As such, Q4 is expected to mark an important turning point in the company's operating profit, which at the midpoint of the range is forecasted to grow nearly 50% versus last year.
Specifically the underlying structural economics of the business are being strengthened with gross margin expanding both sequentially and year over year with additional gross margin improvement expected during Q4 and next year.
And as we double down on actions that are within our control operating cash flow has improved more than $1 $2 billion year to date.
So while the macroeconomic environment remains challenging we are undeterred and are moving forward with deliberate speed to unlock and monetize the full potential of Newell's portfolio of leading brands by building the front end capabilities and trading and leveraging the scale required to consistently win with consumers and customers in our product categories.
Mark Erceg: Finally, for the fourth quarter, we forecast interest expense to be higher year over year, a tax rate in the high teens, and normalized earnings per share in the range of 15 to 20 cents. For the full year, we expect net sales in the range of 8.02 to 8.09 billion dollars largely driven by a core sale decline of about 13 percent. We discussed earlier. Interest expense is forecast to be up significantly versus last year with a normalized tax benefit in the teens, reflecting the size will tax benefit that was realized in the third quarter.
Operator, if you could please open the call for questions.
Certainly.
Ask a question. Please press star one one on your telephone and wait for your name to be announced.
If you wish to remove yourself from the queue Press star one again.
And our first question comes from the line of Chris Carey with Wells Fargo Securities.
Hi, good morning, everyone.
Good morning, Chris.
So I just wanted to talk maybe high level.
Mark Erceg: Normalized deluded earnings per share are now forecasted in the 72 to 77 cents range. At the start of the year, we said tax generation was our number one priority, so we're very pleased that based on our strong year-to-day performance, we can confidently raise our cash flow outlook for the year. Even at top-line expectations and earnings per share estimates have been tempered. We now expect to generate operating cash flow of 800 to 900 million dollars, inclusive of 95 to 120 million dollars of cash payments related to Project Phoenix, which has crisp indicated is on track for 140 to 160 million dollars of pre-tax savings this year. At the midpoint of our outlook operating cash flow improves by more than $1.1 billion a year with pre-tax low productivity expected to be well north of 100 percent.
Can you just talked about the evolution of how you would expect to manage the business I think right now.
Very much a focus on.
Free cash flow and the balance sheet and over time as <unk>.
These macro headwinds.
And other kind of competitive dynamics.
Does it focus could perhaps turn a bit more back to the income statement delivering earnings right. So just maybe the announced the tension in the organization between those two things and.
And I guess the question underlying that is the performance that we're seeing right now.
How much of that is due to you, making certain decisions in favor of the balance sheet and cash flow as opposed to again the income statement given the priorities right now thanks.
Mark Erceg: With the caveat that next year's planning process is still in its very early stages, we thought it might be helpful to provide some high level conceptual thoughts. So with that understanding, meaningful improvement in the top-line run rate is expected on a sequential basis. However, 2024 core sales are still expected to be down as macroeconomic challenges persist and front end capabilities are still being rebuilt. Please note that this preliminary sales commentary is consistent with comments provided at the Deutsche Bank Conference in June, where we stated core sales growth is expected to be below the evergreen target of low single-digit growth over the next 12 to 18 months.
Yes. Thanks for the question. So let me, let me try to provide a little bit of commentary on that in and Youre right. We did at the beginning of this year as we said in the prepared remarks.
Prioritize cash flow and gross margin improvement and structural economic improvement in the business and we've made a series of choices to try to drive that you've seen our inventory is down.
Around $850 million versus the same time last year, which is a massive improvement which is driving the operating cash flow to be $1 $2 billion better.
Mark Erceg: Currency based on current spot rates and combination with planned brand exits might collectively lower net sales by an additional two to three points. Importantly, we expect strong growth margin improvement next year fueled by productivity savings, carry overpricing benefits, let access and obsolete charges and better product mix, which should allow operating margin to expand ahead of a 50 basis point evergreen target, even as we continue to invest behind front end capabilities. Interest expense should be slightly higher in 2024, and at this point we're planning for a normalized effective tax rate of about 17%, which would represent a significant year of year headwind turning for share. As for cash, we'll provide more context once we're further along on our planning process, but in the meantime, the prices that they cash will remain a major focus area for us.
Year to date this year versus last year, you've also seen that we've turned the business to.
Now driving gross margin improvement this quarter of 170 basis points and we expect gross margin in Q4 to be up even more than that.
Versus versus year ago, and some of those choices are things like the July one price increase that we put in the market where is.
As Mark commented on we priced structurally unattractive businesses.
And in some cases, what we've seen as retailers have accepted those price increases consumers have accepted those price increases and the structural profitability of those businesses improved in some cases.
We've lost distribution on that on that on those businesses, but it was effectively zero margin business that we've walked away from and so we think that what we're doing is improving the long term quality of our portfolio consistent with the strategy that we've deployed focused on the top 25 brands.
Mark Erceg: In closing, there are two key takeaways from today's call. First, we are making strong progress on the deployment of our new integrated set of corporate, business unit, functional and brand strategies, all of which were heavily informed by a comprehensive company-wide capability assessment. We now have, for the first time in a long time, very clear where to play and how to win choices, that the major pivot in our front end consumer-facing capabilities will allow us to successfully pursue.
The top 10 countries.
At the same time.
We are very focused on the capability improvement actions that I mentioned around <unk>.
Consumer understanding brand building innovation, which we believe can get the company back to market share growth.
Mark Erceg: Second, Newell is delivering against the two key financial priorities, Gross Margin and Cash Flow, that were established for 2023, even though macro-driven pressures are greater than previously anticipated. Specifically, the underlying structural economics of the business are being strengthened, with Gross Margin expanding both sequentially and year-over-year, with additional Gross Margin improvement expected during Q4 and next year. And as we've doubled down on actions that are within our control, operating Cash Flow has improved more than $1.2 billion a year to date.
More broadly than where we are today.
We are growing market share today on a number of our leading brands brands like Sharpie Expo in rubbermaid, and crock pot and ball, but we're not growing market share across a broad an offset of our brand and we aspire to do that so that when the macro environment turns.
We are positioned with leading brands.
That.
Growing market share.
Mark Erceg: So while the macro-economic environment remains challenging, we are undeterred, and are moving forward with delivered speed to unlock and monetize the full potential of noodles portfolio leading brands by building the front end capabilities and creating and leveraging the scale required to consistently win with consumers and customers in our product categories.
And in a position with a more structurally attractive business and that's that's really the how we're thinking about the trajectory going forward.
And one quick follow up just as you think about that.
<unk>.
Dynamic of over the next 12 months to 18 months that core sales for example.
Operator: Operator, if you could, please open the call for questions. Certainly, to ask a question, please press star-1-1 on your telephone and wait for your name to be announced. If you wish to remove yourself from the queue, press star-1-1 again.
Remained under pressure how much of that is.
A function of.
Category growth.
Market share performance versus things that you think you need to do in the organization to create a cleaner maybe smaller more profitable foundation for longer term.
Christopher Carey: And our first question comes from the line of Chris Carey with Wells Fargo Securities. Hi, good morning, everyone. Morning, Chris.
Yes, I think the majority as I mentioned in the prepared remarks.
This quarter about 80% of the core sales decline was really driven by market contraction in retailer inventory actions.
Christopher Peterson: So I just want to talk maybe high level. Can you just talk about the evolution of how you would expect to manage the business? I think right now is very much a focus on free Cash Flow and the balance sheet and over time as sort of these macro headwinds and other competitive dynamic ease than the focus can perhaps turn a bit more back to the income statement delivering earnings. So just maybe the tension and the organization between those two things.
But theres, 20% that is that's related to us not not having the front end capabilities, where we want them and walking away from some of these structurally challenged businesses.
I think as we go forward youre going to see that 20% bucket improved dramatically.
As the strategy and the capability investments starts to take shape and we believe that's going to turn into a positive rather than a headwind over the next 12 to 24 months.
The category growth dynamics, it's hard to predict as we've said repeatedly but.
Christopher Peterson: And I guess the question underlying that is the performance that we're seeing right now. How much of that is due to you making certain decisions in favor of the balance sheet and Cash Flow as opposed to again the income statement given the priorities right now. Thanks. Yeah, thanks for the questions. Let me try to provide a little bit of commentary on that. And you're right. We did at the beginning of this year, as we said in the prepared remarks.
But I do think that.
The category growth dynamic.
From a macro standpoint, some of the dynamics that are driving that are coming to an end.
We believe that retailer inventory destocking is largely behind us at this point for example.
The consumer underlying consumer pressure, that's causing consumers to.
Prioritize spending on food essentials.
Christopher Peterson: Prioritize Cash Flow and gross margin improvement and structural economic improvement in the business. And we've made a series of choices to try to drive that. You've seen our inventory is down I think around $850 million versus the same time last year, which is a massive improvement, which is driving the operating Cash Flow to be $1.2 billion better year to date this year versus last year. You've also seen that we've turned the business to now driving gross margin improvement this quarter of 170 basis points.
And away from durable and discretionary categories is harder to predict.
Thank you one moment please for our next question.
And our next question comes from the line of Andrea Teixeira with Jpmorgan.
Thank you Chris.
I wanted to.
Go back to this point about growing share you mentioned that it's not enough to grow share in a declining category, which I appreciate the honesty.
But could it make sense.
Christopher Peterson: And we expect gross margin in Q4 to be up even more than that versus versus year ago. And some of those choices are things like the July 1st price increase that we put in the market, where as Mark commented on, we priced structurally unattractive businesses. And in some cases, what we've seen is retailers have accepted those price increases, consumers have accepted those price increases. And the structural profitability of those businesses improved.
Mike.
So some of the businesses.
<unk> been through a lot of rationalization over the years since the Jarden acquisition, but wondering if.
Some of these other businesses, even though they may have.
Cash flow.
There that you can sell but perhaps be more.
I think choice full.
Tom why you can keep Hawaii cannot and I understand that you just mentioned about 20% of what you signed with declining courses have been from not having capabilities or.
Christopher Peterson: In some cases, we've lost distribution on that on those businesses, but it was effectively zero margin business that we've walked away from. And so we think that what we're doing is improving the long term quality of our portfolio consistent with the strategy that we've deployed focused on the top 25 brands, top 10 countries. At the same time, we are very focused on the capability improvement actions that I mentioned around consumer understanding brand building innovation, which we believe can get the company back to market share growth more broadly than where we are today.
Having made choice for decision as four for distribution on things that are not.
There are not so profitable so I wanted to just go back and see if number one you can.
There is space for divestitures or it's going to be in like.
It's not like a food business and therefore, it's more you're getting out of some of these categories some of days.
Skus and how far along in this process do you believe you are because I understood that you've been doing this all along we do.
<unk> seen that very massive reduction in skus.
I'm wondering why it's taking so long or is that something that you realize that you have to continue to do youll have to continue to doing all that to improve profitability.
Christopher Peterson: We are growing market share today on a number of our leading brands, brands like Sharpie and Expo and Rubbermaid and Crockpot and Ball, but we're not growing market share across a broad enough set of our brands. And we aspire to do that so that when the macro environment turns, we are positioned with leading brands that are growing market share and in a position with a more structurally attractive business.
Yes, So let me try to provide some perspective, so when we when we announced the strategy in June.
We had at that point in time, we had 80 brands that we were selling across the company. The 80 brands that we were selling.
Largely fit within the company's portfolio because they are branded products that are.
Christopher Peterson: And that's really how we're thinking about the trajectory going forward, and one quick follow-up. Just as you think about, you know, this dynamic of over the next 12 to 18 months, that, of course, sales, for example, would remain under pressure. How much of that is a function of category growth, market share performance versus things that you think you need to do in the organization to create a cleaner, maybe smaller, or more profitable foundations in the long term?
Sold based on the same capability set of consumer understanding innovation brand building applies to all of the AE brands and they're largely distributed through the same.
Retail channels.
Across the world.
So we feel like we've gotten our portfolio from the divestitures that have been completed over the last five years that fits together and where there is scale that can be leveraged. We have also made important progress on the on the supply chain and the back office to get things onto one system.
Christopher Peterson: Yeah, I think the majority, you know, as I mentioned in the prepared remarks, you know, this quarter about 80% of the core sales decline was really driven by market contraction and retail or inventory actions. But there's 20% that's related to us not having the front-end capabilities where we want and walking away from some of these structurally challenged businesses. I think as we go forward, you're going to see that 20% bucket improved dramatically as the strategy and the capability investment starts to take shape and we believe that's going to turn into a positive rather than a headwind over the next 12 to 24 months.
To get things into one distribution network with the <unk> program.
Et cetera, so that we believe in.
Most cases, we are the best owner of those brands.
So we continue to look at is the portfolio of the right thing and is there value to be unlocked.
But to date, we have not seen.
There's a big opportunity to break up the portfolio and drive value.
We believe the dis synergies and the tax impact.
Would overwhelm any value, we would get from a major divestiture.
That being said.
We also very clearly said that we don't think 80 brands is the right answer and so as part of the strategy. We said, we're going to prioritize the top 25 brands because they represent 90% of the sales and profit of the company. We are moving at pace since we announced that strategy in June and as I mentioned.
Christopher Peterson: The category growth dynamic is hard to predict, as we've said repeatedly, but I do think that the category growth dynamic from a macro standpoint, some of the dynamics that are driving that are coming to an end. We believe that retail or inventory destocking is largely behind us at this point, for example. The underlying consumer pressure that's causing consumers to prioritize spending on food, essentials, and away from durable and discretionary categories is harder to predict. Thank you. One moment, please, for our next question.
In my prepared remarks, we expect to be down from 80 brands down to 60 by the end of this year. So that's already a meaningful reduction in the number of brands in the portfolio and we think we will continue to reduce the number of brands over time.
As we look to how are we reducing the number of brands in the portfolio largely what we're doing is we're converting we're converting shelf space that we have on these smaller less consumer relevant brands into shelf space on our bigger more profitable more consume.
Andrea Teixeira: And our next question comes from the line of Andrea Tixiera with Davey Morgan. Thank you, Chris. I wanted to go back to this point about growing share. You mentioned that it's not enough to grow share in a declining category, which I appreciate the honesty. But could it make sense and perhaps sell some of the businesses? I know you've been through a lot rationalization over the years since the jar, then acquisition. But wondering if some of these other businesses, even though they may have cash flow there that you can't sell, but perhaps you know, be more, I think, choiceful from why you can keep or what it cannot.
Relevant brands, but it takes a little bit of time to do that because.
Retailers reset their shelving.
Typically on an annual basis, and we don't want to create holes across shelving and so we've worked up a plan to sort of migrate this shelf space over time from these small brands that we will be exiting into a more.
Streamlined portfolio focused on the top 25.
Thank you.
One moment please for our next question.
Andrea Teixeira: And I understand that you just mentioned about 20% of what you saw in the declining core sales have been from not having capabilities or having made choiceful decisions for distribution on things that are not so profitable. So I wanted to just go back and see if you number one, you can, there's space for divestitures or it's going to be like, it's not like a full business, and therefore it's more you getting out of some of these categories or some of these skews.
And our next question comes from the line of Bill Chappell with <unk> Securities.
Good morning.
Good morning Bill.
Just kind of keeping it as it seems to be on the kind of a high level conversation. This morning.
This is now I guess some of the third top line this year and I know.
Things change with your with your guidance.
The new outlook mid year.
But.
Trying to understand how force forecast of all your business is right now with.
Andrea Teixeira: And how far along in this process you believe you are? Because I understood that you've been doing these all along from reducing that very massive reduction in skews. So I was wondering why it's taking so long or is that something that you realize like have to continue to do, you have to continue to do in order to improve profitability.
In the mirrors to doing so many things to try to rightsize the ship when the macro environment is so kind of volatile and when I say that I mean, you talked about.
Lowering the number of brands by 'twenty.
Replacing I think a third of the brand managers in the past six months SKU reduction project <unk> project. There are couple of other projects.
Christopher Peterson: Yeah, so let me try to provide some perspective. So, when we announced the strategy in June, we had, at that point in time, we had 80 brands that we were selling across the company. The 80 brands that we were selling largely fit within the company's portfolio because they are branded products that are sold and based on the same capabilities that of consumer understanding, innovation brand building applies to all of the 80 brands and they're largely distributed through the same retail channels across across the world.
At the time when it doesn't seem like anyone in the categories. You play in can really forecast kind of post pandemic recovery or new normal. So just maybe you could touch on.
Work that youre doing too much or that with all these changes happening that forecast ability is really going to be that great for six months until we kind of see helping set or is this just something you had to do in kind of a rip the band aid type moment.
Yes, it's good it's a good question and it's one that we've talked a lot about with the board and with the management team.
Inside the company if you look at.
Christopher Peterson: And so we feel like we've got now a portfolio from the investors that have been completed over the last five years that fits together and where there is scale that can be leveraged. We've also made important progress on the supply chain and the back office to get things on to one IT system to get things into one distribution network with the job at program, et cetera, so that we believe in most cases we are the best owner of those brands.
<unk>.
The core sales growth of minus 9% in Q3, and I think we had guided down 5% to 7%. So we were three points off at the midpoint of the range versus the actual that three point Miss was really an entirely driven by market market growth, which came in weaker than we expected.
That gets to your point, it's a challenging environment to forecast.
The market and consumer off take right now.
That being said.
We believe from the capability assessment work that we've done and the strategy that we've put in place that we need to improve these capabilities because at some point.
Christopher Peterson: So we continue to look at is the portfolio the right thing and is there value to be unlocked. But today, we have not seen that there's a big opportunity to break up the portfolio and drive value because we believe the disadvantages and the tax impact would overwhelm any value we would get from a major divestiture that being said, we also very clearly said that we don't think 80 brands is the right answer.
This market will turn and the macro environment will not be as negative.
As it is now and we want to make sure when that happens that we are fully positioned to take advantage of that with a portfolio of leading brands that have the ability to consistently grow market share and drive market growth.
Christopher Peterson: And so as part of the strategy, we said we're going to prioritize the top 25 brands because they represent 90% of the sales and profit of the company. We are moving at pace since we announced that strategy in June. And as I mentioned in my prepared remarks, we expect to be down from 80 brands down to 60 by the end of this year. So that's already a meaningful reduction in the number of brands in the portfolio.
And what eventually will be a better macro environment.
But we recognize that the macro environment right now is very difficult to forecast, we're trying to run the business on a scenario planning base.
Basis with wider ranges of possible outcomes.
Given that dynamic, but it doesn't cause us to slow down on the capability improvement actions.
Christopher Peterson: And we think we'll continue to reduce the number of brands over time. As we look to how are we reducing the number of brands in the portfolio, largely what we're doing is we are converting, we're converting shelf space that we have on these smaller, less consumer relevant brands into shelf space on our bigger, more profitable, more consumer relevant brands. But it takes a little bit of time to do that because retailers reset their shelving typically on an annual basis.
Christopher Peterson: And we don't want to create holes across shelving. And so we've worked up a plan to sort of migrate this shelf space over time from these small brands that we will be exiting into a more streamlined portfolio. So focused on the top 25. Thank you.
We need to drive because we believe that those need to happen irrespective of the macro environment.
Got it.
Lee.
Listening to the initiatives and stuff like that I mean, the way you look at it as they've all been announced and in our process. Its not you are continuing to look for new initiatives or new.
Operator: One moment please for our next question.
Ways to change the business, we just got to keep pushing forward with the original kind of.
Rework.
That's exactly right. So there is there from the capability assessment, which was comprehensive that led to the strategy. There has been no change in the strategy or in the initiatives that we're driving to try to drive the capability and improvement in many of them are now well underway some of them have actually already been <unk>.
Complete it not all not all but.
But it's not that we're adding new things onto the list.
We're driving the plan that we put in place.
Part of the June strategy review.
Bill Tappel: And our next question comes from the line of Bill Tappel who drew a secure. Thanks. Good morning. Good morning, Bill. Just kind of keeping it as it seems to be on the kind of a high level conversation this morning. Bill, this is now kind of the third cut to top line this year, and I know it's been changed with your kind of new outlook mid-year. But trying to understand, you know, how force-procassible your business is right now in the kind of mirrors doing so many things to try to right size the ship when the macro environment is so kind of volatile.
Got it and then one just Bob on.
So writing instruments, I mean that was a category that Ed.
At least low to mid single digit growth for many years prior to going into the pandemic, obviously, the pandemic changed everything with back to school and what have you.
As we're getting back to a more normalized environment is this a.
Long term mid single digit growth of low to mid single digit growth category or is it more mature now and maybe not as.
As opportunistic as it used to be.
And we've looked at the writing category growth.
Over the last five years over the last 10 years over the last 20 years and.
Bill Tappel: And when I say that, I mean, you talked about lowering the number of brands by 20, replacing, I think, a third of the brand managers in the past six months. It's a skewer reduction project of it project, you know, there are a couple other projects in there and at the time when, you know, it doesn't seem like anyone in the categories you play in can really forecast a kind of post pandemic recovery or new normal.
If you if you normalize out sort of the Covid blip.
It's been a category that's been growing kind of low single digits.
On a global basis.
So we think that that's the right place for it to be I don't think it's a mid single digit growing category I think it's a low single digit growing category and.
Christopher Peterson: So I'm just maybe you could touch on you worry that you're doing too much or that with all these changes happening that forecast ability is really going to be that great for six months until we kind of see how things set. Or is this just something you had to do in, you know, it's kind of a rip the bandaid type moment. Yeah, it's good. It's a good question. It's one that we talk a lot about with the board and with the management team inside the company.
And that's our that's our view of what we think is likely in a normalized basis going forward.
Great. Thanks, so much.
Thank you.
One moment for our next question please.
Our next question comes from the line of Peter Grom with UBS.
Thanks, operator, and good morning, everyone hope you're doing well so.
I appreciate all the commentary on 24.
Christopher Peterson: If you look at the core sales growth of minus 9% and Q3, and I think we had guided down five to seven. So we were three points off at the midpoint of the range versus the actual. That three point miss was really entrant entirely driven by market can market growth, which came in weaker than we expected. And that gets to your point of it's a challenging environment to forecast the market and consumer off take right now.
And we will get more concrete guidance in February but is there any way to frame the degree of margin expansion that youre kind of expecting.
Just because you know should we expect kind of the <unk> exit rate, which is pretty substantial to continue should it be a bit more subdued than that.
Just because given the top line commentary higher insurance rates.
If it's less robust that would imply a pretty substantial step down in EPS, so not trying to pin down guidance or anything, but just would be helpful to just trying to understand directionally, how we should be thinking about it.
Christopher Peterson: That being said, we believe from the capability assessment work that we've done and the strategy that we put in place that we we need to improve these capabilities because at some point this market will turn and the macro environment will not be as negative as it is now. And we want to make sure when that happens that we are fully positioned to take advantage of that with a portfolio of leading brands that have the ability to consistently grow market share and drive market growth in a in what eventually will be a better macro environment.
Yes, let me offer a few thoughts as it relates to that and maybe I can even reinforce some of the commentary about the current year gross margin progression.
We're really excited by what's happening on the gross margin front right. We said we have to improve the structural economics of the business and we've been getting after that in quick order here and Youre seeing that in the fact that we've improved sequentially from Q1 to Q2 Q2 to Q3, and we're calling for a very large continued progression on gross margin from Q3 to Q4 of this year, which we do think will put us into a good launch.
Pad going into the following year.
It's notable that this is the first time gross margin expanded since the second quarter of 'twenty, one and it's driven in part by the fact that our fuel productivity savings. This year are running at almost six 5% of Cogs and thats not a coincidence I mean thats nearly <unk>, what we've normally seen in most years it traces back to the project Phoenix and the decisions to restructure the business. So that the supply chain is a.
Christopher Peterson: But we recognize that the macro environment right now is very difficult to forecast. We're trying to run the business on a scenario planning basis with wider ranges of possible outcomes given that dynamic, but it doesn't cause us to slow down on the capability improvement actions that we need to drive because we believe that those need to happen irrespective of the macro environment. Got it. I mean, when I'm listening to the initiatives and stuff like that, I mean, the way you look at it, they've all been announced and in our process, it's not you're continuing to look for new initiatives or new ways to change the business.
Unified force as its procurement and that is lending itself to all kinds of additional opportunities that we're seeing.
That strong progression.
Is really what's allowing us to call in the fourth quarter for that gross margin to expand and more importantly, the normalized operating margin based on the commentary. We provided is expected to be up as I said $290 to 390 basis points I mean, that's a huge move in the right direction. So I know, it's difficult to see all that underneath the surface when youre looking at the top line compression driven by market contraction in <unk>.
Destocking, principally but it's most certainly there we haven't provided any specifics on gross margin for next year and we won't at this time, but we have said that we look at our evergreen targets.
Christopher Peterson: It's we just got to keep pushing forward with the original kind of. That's exactly right. So from the capability assessment, which was comprehensive, that led to the strategy, there's been no change in the strategy, or in the initiatives that we're driving to try to drive the capability and improvement. And many of them are now well underway. Some of them have actually already been completed, not all, but it's not that we're adding new things onto the list. We're driving the plan that we put in place as part of the June strategy review. Got it.
<unk> targets of growing op margin 50 basis points per year, we think will be certainly at or above that next year and most of that will be driven by continued gross margin progress that we're making.
Okay.
Got it that's really helpful. And then just following up on the category performance, which obviously has been called out several times as the big genre of the week or to re queue can you maybe just give us some color on how that really progressed through the coronary I'm going to get worse as we kind of later in August and September and have category trends further slowed here in <unk>.
Albert.
Yes, I think as I mentioned.
Christopher Peterson: And then one just popped on the writing instruments. I mean, that was a category that had at least low to mid single digit growth for many years prior and going into the pandemic. Obviously, the pandemic changed everything back to school.
Before that really the driver of the core sales.
Miss versus our guidance in Q3 was the market contraction rate, which came in about three points higher than what we expected.
Christopher Peterson: As we're getting back to a more normalized environment, is this a long term mid single digit growth or low to mid single digit growth category, or is it more mature now and it's maybe not as opportunistic as it used to be. Yeah, we've looked at that at the writing category growth over the last five years, over the last 10 years, over the last 20 years. And over, if you if you normalize out sort of the COVID blip, it's been a category that's been growing kind of low single digits on a global basis.
We did see that September was the weakest quarter, our weakest month of the third quarter.
And so we did see the trend.
In terms of market contraction accelerate.
Into the back part of the quarter and obviously, we've got some view of the first part of October and that is running very much in line with.
With our guidance for the fourth quarter so.
<unk>.
That's a bit on that.
The inter quarter play, yes, if I could I think it might be helpful. Because obviously in Q3 as Chris indicated we saw our core sales down by 9% for the fourth quarter were effectively saying that we think that our core sales will be down somewhere between 14, and 11% and I think it might be instructive to try and kind of decompose that.
Christopher Peterson: So we think that that's the right place for it to be. I don't think it's a mid single digit growing category. I think it's a low single digit growing category. And that's our view of what we think is likely in a normalized basis going forward.
Bill Tappel: Great. Thanks so much. Thank you.
Operator: One moment for our next question, please.
For everybody here on the call today, so in both Q3 and Q4, we expect the market to continue to contract based on our analytics, we think that'll be somewhere mid single digit to high single digit for the sake of argument, let's call that somewhere down six 7% that will be true both in the third quarter and we think in the fourth quarter trade Destocking, we're getting towards the tail end of that we think it was somewhere between.
Peter Graham: Our next question comes from the line of Peter Graham with UBS. Thanks operator. Good morning, everyone. Hope you're doing well. So I appreciate all the commentary on 24 and I'm sure we'll get more concrete guidance in February. But is there any way to frame the degree of margin expansion that you're kind of expecting, you know, just because, you know, should we expect kind of the 4Q exit rate, which is pretty substantial to continue should have been more subdued than that.
Minus one and minus two in Q3, we think that will carry over to Q4 as well and as Chris indicated there was a certain element of share loss that we incurred let's call that a point and if you do that math on Q3, Youll see that thats roughly down the nine that we obviously just printed in our release the only two things that are then different in Q4 is as Chris indicated we did take pricing action on <unk>.
<unk>. This is part of our enhanced capabilities to actually do more data analytics, you'll recall that we actually literally looked at the structural economics of 6000 discrete skus and being able to make those pricing actions. So they were very targeted and they were in the right places, but we will lose some distribution as a result of that in Q4, we think that might be a point or two but again. This is stuff where we are economically indifferent.
Peter Graham: You know, just because, you know, given the top line commentary, you know, higher interest, sorry, if it's less robust, that would apply a pretty substantial step down an APS. So now trying to pin down guidance or anything, but just be helpful to just try to understand directly how we should be thinking about it.
Mark Erceg: Yeah, let me offer a few thoughts as it relates to that. And maybe I can even reinforce some of the commentary about the current year gross margin progression. You know, we're really excited by what's happening on the gross margin front, right? We said we have to improve the structural economics of the business and we've been getting after that in quick order here. And you're seeing that in the fact that we've improved sequentially from Q1 to Q2, Q2 to Q3 and we're calling for a very large continued progression on gross margin from Q3 to Q4 of this year, which we do think will put us into a good launch pad going into the following year.
The structural economics are so poor that pricing actions needed to be taken into the business falls away. It falls away and then the supply chain will make up the differential the other piece that is really play into it and get back to a question that was asked earlier that Chris provided an answer too is we have about two points in the fourth quarter, where we think we would have less deep discount promotions.
Because what we're doing now is making the tough calls today and make sure. We set the launch pad properly for 24, and so we've had a lot of promotions in the fourth quarter, historically, where frankly, we didn't make any money and so what we're doing is we're walking away from these structurally untenable decisions that were made in the past to get ourselves on good footing and from there we can grow our way back out based on the.
Mark Erceg: You know, it's notable that this is the first time gross margin expanded since the second quarter of 21. And it's driven in part by the fact that our fuel productivity savings this year are running at almost six and a half percent of cogs. And that's not a coincidence. I mean, that's nearly 2X what we've normally seen in most years. It traces back the project Phoenix and the decisions to restructure the business so that the supply chain is a unified force as is procurement.
Work, that's being done.
Got it that's really helpful I'll pass it on.
Thank you.
Please for our next question.
Mark Erceg: And that's lending itself all kinds of additional opportunities that we're seeing. That strong progression is really what's allowing us to call in the fourth quarter for that gross margin to expand. And more importantly, the normalize operating margin based on the commentary we provided is expected to be up as I said, 290 to 390 basis points. I mean, that's a huge move in the right direction. So I know it's difficult to see all that underneath the surface when you're looking at the top line compression driven by market contraction and trade is talking principally, but it's most certainly there.
Okay.
And our next question comes from the line of Brian Mcnamara with Canaccord Genuity.
Hey, good morning, guys. Thanks for taking my questions and congrats on a really strong improvement in cash flow. A question, we often get asked if and when we will see top line growth that Noel again, you've mentioned that sales will be down again next year. So I guess, what should give investors confidence that youll reach those evergreen targets in 2025.
Yes, I think the I think that question. It's one that we ask ourselves often as well and I think when we laid out the strategy. We were very clear that this was going to be a multiyear strategy and we said that we expected for the next four to six quarters that we would be below the.
Mark Erceg: We haven't provided any specifics on gross margin for next year and we won't at this time, but we have said that we look at our evergreen targets of growing up margin 50 basis points per year. We think will be certainly had or above that next year and most of that will be driven by continued gross margin progress that were made. God, that's really helpful.
Evergreen target on core sales growth because of the capability investment that was required to get the company back to sustainable core sales growth.
Mark Erceg: And then just following up on the category performance, which obviously has been called out several times. There's a big genre of the week or three to maybe just give us some color on how that really progressed through the corner, you know, going to get worse as we kind of were later in August and in September and have category trends, you know, further slow here in October. Yeah, I think, you know, as I mentioned before, the really the driver of the core sales miss versus our guidance in Q3 was the market contraction rate, which came in about three points higher than what we expected.
We are very much on track with the capability improvement actions that we've taken I feel very good about the progress we've made over the last four months since we announced the strategy. We're only four months into this strategy.
But.
But I think we're making incredibly fast and strong progress against that the piece that is sort of overwhelming that at the moment.
As the market contraction and the retail inventory actions.
But we believe that at some point those are going away as I mentioned, it's hard to predict when that's going to be.
Mark Erceg: We did see that September was the weakest quarter or weakest month of the third quarter. And so we did see the trend in terms of market contraction accelerate into the back part of the quarter. And obviously we've got, you know, some view of the first part of October and that, you know, is running very much in line with with with our guidance for the fourth quarter. So, you know, that's that's a bit on the on the sort of the inner inner quarter play.
As Mark said in his prepared remarks, as we think about next year.
We think core sales is likely going to be down next year, but we expect it to be sequentially better next year than this year.
And.
And we're very bullish on the progress we're making on the strategy on the capability improvements, we think will be.
We'll have green shoots to point to in 'twenty four.
Some that work.
That will help improve the trend and we think in 'twenty five.
Mark Erceg: Yeah, if I could, I think it might be helpful because obviously in Q3 as Chris indicated, you know, we saw our core sales down by 9%. For the fourth quarter, we're effectively saying that we think that our core sales will be down somewhere between, you know, 14 and 11%. And I think it might be instructive to try and kind of decompose that for everybody here on the call today. So in both Q3 and Q4, we expect the market to continue to contract based on our analytics.
We're going to be in a much better place.
Got it and then secondly, with the 20 brands Youll lose by the end of the year as you reallocate shelf space with your retail partners are those largely being discontinued or any of them being sold or licensed or other.
Yes, I would say that.
Globally.
80% to 90% are just being discontinued.
Mark Erceg: We think that'll be somewhere mid single digits, a high single digit, the sake of argument. Let's call that somewhere down, you know, 67%. That will be true both in the third quarter and we think in the fourth quarter. Trade defocking, we're getting towards the tail end of that. We think it was somewhere between minus 1 and minus 2 and Q3. We think that will carry over to Q4 as well. And as Chris indicated, there was a certain element of share loss that we incurred.
There are a handful that we're licensing and there is and there is one or two that we're actually going to sell.
They won't be material sales, but but we are looking at all three alternatives as we go through this in some cases, we have brands that might be $2 million of revenue and the right answer is just the discontinue the brand.
Mark Erceg: Let's call that a point. And if you do that map on Q3, you'll see that that's roughly down the nine that we obviously just printed in our release. The only two things that are then different in Q4 is as Chris indicated, we did take pricing action on 71. This is part of our enhanced capabilities to actually do more data analytics. You'll recall that we actually literally looked at the structural economics of 6000 discrete skews and being able to make those pricing actions.
Does it is not worth it to go and try to sell them in other cases, we have brands that are more meaningful that are either a country specific brand that doesn't really add to the portfolio and we don't think is leveraged ball and those are the ones that we're looking.
To sell.
An example, there is.
Mark Erceg: But they were very targeted and they were in the right places. But we will lose some distribution as a result for that in Q4. We think that might be a point or two. But again, this is up where we're economically indifferent because the structural economics were so poor that the pricing actions needed to be taken and that the business falls away and then the supply chain will make up the differential. The other piece that is really playing into it and get back to a question that was asked earlier that Chris provided an answer to is we have about two points in the fourth quarter where we think we're going to have less discount promotions because what we're doing now is making the tough calls today to make sure we set the launch pad properly for 24.
We have a brand in Italy.
Called Millefiori, which is a home.
Home fragrance brand, it's largely distributed only in Italy and.
And we've reached a sale agreement on that brand, where we expect to close the sale of that brand this quarter. So.
Great. Thanks for the color best of luck guys.
Thank you one moment please for our next question.
Our next question comes from the line of Olivia toe with Raymond James.
Yes.
Mark Erceg: And so we've had a lot of promotions in the fourth quarter historically where frankly we didn't make any money. And so what we're doing is we're walking away from these structurally untenable decisions that were made in the past to get ourselves on good footing. And from there, we can grow our way back out based on the capability work that's being done. Got it. That's really helpful. I'll pass it on. Thank you. One moment, please for our next question.
Great. Thanks.
First question just given obviously the.
On cash flow if you could talk about what that implies with respect to your commitment to the dividend at current levels.
Yeah look I think we feel pretty good about where we are we made an intervention earlier this year to right size. The dividend. So we said that our strategy as it relates to that is to be somewhere in the 30% to 35% dividend payout ratio and we're going to continue to tag along with that.
Brian McNamara: And our next question comes from the line of Brian McNamara with Canacorn Genuity. Good morning, guys. Thanks for taking the questions.
Going forward. So we feel really good about our cash position I mean, it's important to note that we paid down a significant amount of debt.
So far net debt is down $500 million year over year.
Christopher Peterson: We can wrap on the really strong improvement in cash flow. A question we often get asked is if and when we'll see top line growth at Newell again. You've mentioned that sales will be down again next year. So I guess what should you give investors confidence that you'll reach those evergreen targets in 2025? Yeah, I think the I think I'm that question. It's one that we ask ourselves often as well.
$400 million year to date, so we feel really good about the work that we're doing everything I would just take this opportunity to point to out and speak out too, but you'll recall that our inventory kind of peaked at $2 6 billion in the third quarter of last year and as we go forward and kind of do our year end projections. We think by the end of this year, we're going to have literally drawn down inventory by $1 billion.
On top of the market contraction that we're obviously contending with so the fixed cost absorption from having that market contraction in the trade destocking and our self selecting decision to basically hold back production in order to kind of cleared the inventory released the cash and then set the right base point for the next few years going forward and it's really quite know.
Christopher Peterson: And I think when we laid out the strategy, we were very clear that this was going to be a multi year strategy. And we said that we expected for the next four to six quarters that we would be below the the evergreen target on core sales growth because of the capability investment that was required to get the company back to sustainable core sales growth. We are very much on track with the capability improvement actions that we've taken.
The other thing that we haven't talked about as much as just the carryover inflation effects that we've had to incur because of the way we do our inventory costing at the end of last year. When we saw inflation running high single digits. This year is kind of low single digits, we suspended an awful lot of inflation charges into our inventory balance.
Christopher Peterson: I feel very good about the progress we've made over the last four months since we announced the strategy or only four months into the strategy. But I think we're making incredibly fast and strong progress against that. The piece that is sort of overwhelming that at the moment is the market contraction and the retail inventory actions. But we believe that at some point those are going to wait. As I mentioned, it's hard to predict when that's going to be.
And over the first second and third quarters of this year, we've been bleeding out.
<unk> in effect and it's obviously been over $200 million.
Of inflation that was price basically incurred in the prior year, that's now basically being bled through the P&L This year, which at the end of the third quarter here at now stopped and it actually reversed and starts going the other way. So we feel really good about our cash position feel really good about our gross margin position.
Christopher Peterson: As Mark said in his prepared remarks, as we think about next year, you know, we think core sales is likely going to be down next year, but we expect it to be sequentially better next year than this year. And we're very bullish on the progress we're making on the strategy on the capability improvements. We think we'll have green shoots to point two in 24 from that work that will help improve the trend.
And we're excited about the difficult decisions, we have been taking to set the business up for success in the future. As we then make the capability investments to really start driving the front end of the operation.
Got it and then.
It sounds like 'twenty four is obviously the challenges are expected.
Can you.
As you think about a lot of moving pieces eventually.
What imagine it innovation.
Christopher Peterson: And we think in 25, we're going to be in a much better place. And then secondly, with the 20 brands, you'll lose by the end of the year as you reallocate shell space with your retail partners. Are those largely being discontinued or any of them being sold or licensed or other? Thanks. Yeah, I would say that probably 80 to 90% are just being discontinued. There are a handful that we are licensing and there's one or two that we are actually going to sell.
On innovation in order to drive sales recovery will become part of the plan.
Can you talk about that and other actions that you can take in the interim that can improve your ability to.
To combat the tough environment.
Maybe a little bit more.
You briefly talked about the back to school categories that maybe some more specifics around some of the other.
Moving parts within the division.
Ones that you think can recover faster versus lines that will clearly still have structural challenges that will take.
Even more time to address.
Christopher Peterson: They won't be material sales, but we are looking at all three alternatives as we go through this. In some cases, we have brands that might be $2 million of revenue and the right answer is just to discontinue the brand because it's not worth it to go and try to sell them. In other cases, we have brands that are more meaningful that are either a country-specific brand that doesn't really add to the portfolio and we don't think is leverageable.
Just walking through sort of the.
The different businesses and thinking about the recovery cash thank.
Thank you.
Yeah. So.
So let me try from a from a company standpoint, first which is I think where you started so we are doing a tremendous amount of.
Change to get the front end capability.
In a place where we think we can consistently drive market growth and market share gains in the categories in which we compete and we talked about in my prepared remarks, the innovation process that we've put in place.
Christopher Peterson: And those are the ones that we're looking to sell. An example there is we have a brand in Italy called Milafiori, which is a home fragrance brand. It's largely distributed only in Italy and we've reached a sale agreement on that brand where we expected to close the sale of that brand this quarter.
We're putting in place a brand management structure and importantly, it's not just the brand manager, but we're also putting multifunctional teams against the top 25 brands, which did not exist before we're putting in place a selling capability that is a new selling capability focused on going after incremental distribution.
Christopher Peterson: Thanks for the call and best of luck, guys. Thank you.
Operator: One moment please for our next question.
<unk> opportunities, which we believe there are a significant amount off we've started to put in place now a measurement system to look at our distribution or selling our merchandising and our promotion, which many other CPG companies have but we were not measuring and what we're finding is that in many of our categories are.
Olivia Tongue: Our next question comes from the line of Olivia Tongue with Raymond James. Great. Thanks. Let's question just given obviously the focus on cash flow. If you could talk about what that implies with respect to your commitment to the dividend at current levels. Yeah, look, I think we feel pretty good about where we are. We made an intervention earlier this year to right size the dividend. So we said that our strategy as it relates that is to be some more than 30 to 35% dividend payout ratio.
Sure our shelf is below our market share. So we think we've got big opportunity.
To change the retail environment to get our brands more appropriately distributed.
<unk>.
We also.
Our focused on.
Olivia Tongue: And we're going to continue to tack along with that, you know, going forward. So we feel really good about our cash position. I mean, it's important to note that we pay down a significant amount of debt. You know, so far net debt is down $500 million a year over a year, $400 million a year to date. So we feel really good about the work that we're doing. The thing I would just take this opportunity to point to out and speak out to it.
Something that we're calling internally pillars of competitive advantage and we are starting to measure our brands and our products against superiority on product performance on packaging and claims on brand communication.
On retail execution, both in store and online and on value from a pricing standpoint, and when I say value I'm not talking about low price I'm talking about representing a good value for the feature benefit set that we're offering.
Olivia Tongue: You'll recall that, you know, our inventory kind of peak at $2.6 billion in the third quarter last year. And as we go forward and kind of do our year end projections, we think by the end of this year, we're going to have literally drawn down inventory by a billion dollars on top of the market contraction that we're obviously contending with. So the fixed cost absorption from having that market contraction and the trade is talking and our self selecting decision to basically hold back production in order to kind of clear the inventory, release the cash and then set the right base point for the next year's going forward.
Really focused on the <unk> part of the market.
And that all is new capability with Kpis that we're putting across the front end of the organization. It is a lot of change on the front end, but it has all the right things and we're seeing significant opportunities for improvement some of them are going to take time, because if you put a new innovation idea in the funnel it might take.
Olivia Tongue: And it's really quite notable. The other thing that we haven't talked about as much is just the carryover inflation effects that we've had to incur. Because of the way we do our inventory costing at the end of last year, when we saw inflation running, you know, high single digits this year's kind of low single digits, we suspended an awful lot of inflation charges into our inventory balance. And over the first, second and third quarters of this year, we've been believing out that value in effect.
Olivia Tongue: And it's honestly been over $200 million of inflation that was basically incurred in the prior year that's now basically been led through the PNL this year, which at the end of the third quarter here, it now stops and it actually reverses and starts going the other way. So we feel really good about our cash position, feel really good about our gross market position. And we're excited about the difficult decisions we've been taking to set the business up for success in the future as we then make the capability investments to really start driving the front end of the operation.
18 to 24 months before it comes out and is ready to launch some of them are faster.
Things like distribution, new distribution opportunities, where we're under space with our existing brands and products that can go faster and so that's why when.
When we announced the strategy in June we said this is a multiyear turnaround and we said that it's going to take four to six quarters for this to really all come together.
But it's across all of those vectors that we're driving improvement on the front end I will say the other thing I'll say on your question on categories.
Because the company was operating previously.
Seven business units effectively.
The capability of each of those business units was highly variable because they were all operating effectively independently and so we have some business units that are starting from a position of relatively strong capabilities, where there is plus up opportunity, but theyre already were 60% of the way of where are we.
Mark Erceg: Got it. And then it sounds like 24 is obviously going to the challenges are expected to continue. As you think about a lot of the moving pieces eventually would imagine that, you know, innovation and focusing on innovation, notice drive sales recovery will become part of the plan. Can you talk about that and other actions that you can take in the interim that can improve your ability to to combat the top environment, you know, maybe a little bit more, you know, you briefly talked about the fact that school categories, but maybe some more specifics around some of the other moving parts within the division.
Needed to be and an example of that would be the writing business.
Which we're growing market share and it's our most profitable business.
We do have very strong products that are superior in the market that represent great value. There are other categories, where there is.
Starting from almost zero front end capability that we need massive improvement.
Mark Erceg: And then, you know, ones that you think in recover faster versus ones that will clearly still have structural challenges that'll take even more time to address and, you know, just just walking through, you know, sort of the different businesses and thinking about, you know, the recovery past. Yeah, so let me try from a from a company standpoint first, which is I think where you started. So we are doing a tremendous amount of change to get the front end capability in a place where we think we can consistently drive market growth and market share gains in the categories in which we compete.
And an example, there would be more like the outdoor and rec business.
We're in that business.
There's more work to do on the capability improvement to get that business back back to.
Performing and getting back to growth.
Thank you one moment please for our next question.
And our next question comes from the line of Lauren Lieberman with Barclays.
Thanks, Good morning, guys.
You've covered so much ground.
But I just thought maybe it'd be interesting to ask about.
Dialogue with retailers.
You talked about two points less in the fourth quarter from eliminating some of these money losing the promotion.
Mark Erceg: We're putting in place a brand management structure, and importantly, it's not just the brand manager, but we're also putting multi functional teams against the top 25 brands, which did not exist before. We're putting in place a selling capability that is a new selling capability focused on going after incremental distribution opportunities, which we believe there are a significant amount not. We've started to put in place now a measurement system to look at our distribution, our selling, our merchandising and our promotion, which many other CPG companies have, but we were not measuring.
But your retailers also lose on that I mean, good for your P&L, obviously better for the health of the business long term, but that does.
Detracted from from retailer trends in some of these categories. So I guess, what can you tell us about the conversation with retailers, how they feel about the timeline or progression some of the band aid ripping off youre doing in the near term.
And factoring into their sort of planning for next year and thoughts about category growth.
Thanks, Lauren and it's been a big focus of ours as we've talked a little bit about in the past and it continues to be.
Mark Erceg: And what we're finding is that in many of our categories, our share shelf is below our market share. So we think we've got big opportunity to change the retail environment to get our brands more appropriately distributed. We also are focused on something that we're calling internally pillars of competitive advantage, and we're starting to measure our brands and our products against superiority on product performance on packaging and claims on brand communication on retail execution, both in store and online and on value from a pricing standpoint.
<unk>.
I've had top to top meetings with.
Several of our top retailers.
Both in the U S and internationally and.
As we've done those meetings.
I would describe our relationships.
Strong and I would say our relationships with retailers today are significantly better than where we were two years ago and the reason for that is really the implementation of avid and the simplification work that we've done.
This may be a little bit in the weeds, but if I if I take an example.
Our largest retail customer we used to operate with them with 23 different legal entities 23 different vendor numbers, we would ship them.
Mark Erceg: When I say value, I'm not talking about low price, I'm talking about representing a good value for the feature benefits set that we're offering. Really focused on the MPPHPP part of the market, and that all is new capability with KPIs that we are putting across the front end of the organization. It is a lot of change on the front end, but it is all the right things and we're seeing significant opportunities for improvement.
Forced them to provide 23 orders, we would ship them 23 different LTE all shipments it was confusing chaotic and we didn't have one.
Voice to that customer.
I could've picked.
The number of customers where that was the case if you look at where we are today, we interface with them with one legal entity and one vendor number we've converted our shipments from what was probably in the twenties on 20% full truckload to now 80% full truckload shipments.
Mark Erceg: Some of them are going to take time because if you put a new innovation idea in the funnel, it might take 18 to 24 months before it comes out and is ready to launch. Some of them are faster, things like distribution, new distribution opportunities where we're under-spaced with our existing brands and products, that can go faster. That's why when we announced the strategy in June, we said this is a multi-year turnaround, and we said that it's going to take four to six quarters for this to really all come together.
So we are a dramatically better.
Supplier to retailers and they recognize that and seen the improvement that we've made.
And we are we are the largest and most of our retail customers the largest general merchandise supplier to them.
Mark Erceg: But it's across all of those vectors that we're driving improvement on the front end. The other thing I'll say on your question on categories is because the company was operating previously in seven business units effectively, the capability of each of those business units was highly variable because they were all operating effectively independently. So we have some business units that are starting from a position of relatively strong capabilities where there's plots up opportunity, but there already were 60% of the way of where we needed to be.
They want us to win they recognize the journey that we're on.
And there and they are leaning in to help support us.
Mark Erceg: An example of that would be the writing business, which we're growing market share in. It's our most profitable business. We do have very strong products that are superior in the market that represent great value. There are other categories where we're starting from almost zero front end capability that we need massive improvement. An example there would be more like the outdoor and wreck business where in that business there's more work to do on the capability improvement to get that business back to. Performing and getting back to growth.
We're not making any of these choices in a vacuum.
When we make these choices to improve the structural economics.
We have very open dialogue with our retail customers. So that we don't surprise them, we don't leave them in a bind.
Christopher Peterson: Thank you. One moment, please. For our next question.
But we've got to make the right choices for Newell.
We're trying to do this in a way that's a win win partnership with them and I think I think largely.
Retail our largest customers are very supportive of that.
Thanks, so much.
Yes.
One moment please.
And our final question comes from the line of Filippo for Lora with Citi.
Hey, good morning, guys.
First question on the inventory side.
You guys mentioned that you feel like the tail end of the inventory reductions I guess, what gives you the confidence that that's the case in case the categories from a consumption led to look to continue to be soft.
Is that still have a further reduction into next year and then second question on the pricing standpoint, I know youll price actual are justified but to what extent lost market share performance was driven by competitors not following on pricing.
Lauren Lieberman: Our next question comes from the line of Lauren Lieberman with Barclays. Thanks. Good morning, guys. I've covered so much ground. But I just thought maybe it'd be interesting to ask about dialogue with retailers. So you talked about, you know, two points less than the fourth quarter from, you know, eliminating some of these, you know, money losing the promotions. But, you know, retailers also lose on that. I mean, it's good for your piano, obviously, and better for the health of the business long term.
If you can comment on that would be great. Thank you.
Yes.
Yes, let me start with the inventory so one of the things that we do as we measure weeks of coverage at our top retailers and we get the data directly from the retailers of how much inventory they have on hand, and as we saw their weeks of cover.
Lauren Lieberman: But that does detract a bit, you know, from, from retailer trends in some of these categories. So, guess what can you tell us about the conversation with retailers, how they feel about the timeline of progression, some of the bandaid ripping off you're doing in the near term. And how the factoring into their, you know, sort of planning for next year and thoughts about category growth. Thanks. Yeah, thanks Lauren. And it's been a big focus of ours.
Accelerator lab.
Last year when the market shifted in Q3 of last year, we've now seen their weeks of cover come back down and actually as we've implemented.
<unk> in.
In the U S market our delivery times are much are also much shorter which has allowed them to reduce weeks of cover even more.
So from our view of weeks of cover we believe that largely the weeks of cover are in a good place and we think retailers would be taking significant out of stock risk. If they go lower on weeks of cover.
Lauren Lieberman: As we've talked a little bit about in the past and it continues to be, you know, I've had top to top meetings with several of our top retailers, both in the U.S, and internationally. And as we've done those meetings. I would describe our relationships as very strong. And I would say our relationships with retailers today are significantly better than where we were two years ago. And the reason for that is really the implementation of avid and the simplification work that we've done.
Your question on if the consumption continues to go down couldnt that allow because.
You maintained the same weeks of cover could that allow another.
The amount of inventory reduction in the answer to that is yes, but it's not going to be anywhere near the magnitude of what we've seen over the last.
Nine to 12 months on.
On the pricing.
Question I think that.
We have largely led pricing because we are the market leading brands and most of the categories in which we compete.
Lauren Lieberman: You know, this may be a little bit in the weeds, but if I take an example of our largest retail customer, we used to operate with them with 23 different legal entities, 23 different vendor numbers. We would ship them. We would force them to provide 23 orders. We'd ship them 23 different LTL shipments. It was confusing, chaotic, and we didn't have one voice to that customer. And that's, I could have picked any number of customers where that was the case.
Say.
Broadly we've seen competition fall.
So for the most part.
Because everybody was dealing with the same input cost inflation and there wasn't really an opportunity for them not to follow however, there are selective cases in selected businesses.
We priced and competition has not fully followed.
And we are monitoring those situations.
And if we need to we will react appropriately.
Lauren Lieberman: If you look at where we are today, we interface with them with one legal entity, one vendor number. We've converted our shipments from what was probably in the 20s on 20% full truckload to now 80% full truckload shipments. So we are a dramatically better supplier to retailers. And they recognize that and seen the improvement that we've made. And we are the largest in most of our retail customers, the largest general merchandise supplier to them.
To make sure that we're maintaining our market share.
Thank you.
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 Newell brands' Dot com.
You may now disconnect have a great day.
Lauren Lieberman: They want us to win. They recognize the journey that we're on. And they're leading in to help support us. We're not making any of these choices in a vacuum. When we make these choices to improve the structural economics, we have very open dialogues with our retail customers so that we don't surprise them. We don't leave them in a bind. But, you know, we've got to make the right choices for NULL. And we're trying to do this in a way that's a win-win partnership with them. And I think largely the retail, our largest customers are very supportive of that. Thank you so much. Thank you. One moment please.
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Filippo Falorni: And our final question comes from the line of Filippo Falorni with City. First question on the inventory side. You guys both mentioned that you feel like you're at the tail end of the inventory reduction. I guess what gives you the confidence that that's the case in case the categories from a consumption level were to continue to be soft. And is that erase all the further reduction into next year. And then from a second question on the pricing standpoint, I know your price action were justified. But to what extent your worst market share performance was driven by competitors not following on pricing. If you can comment on that would be great. Thank you.
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Mark Erceg: Yeah, let me start with the inventory. So one of the things that we do is we measure weeks of coverage at our top retailers. And we get the data directly from the retailers of how much inventory they have on hand. And as we saw their weeks of cover. Accelerate last year when the market shifted in Q3 of last year, we've now seen their weeks of cover come back down. And actually, as we've implemented, obid in the US market, our delivery times are much are also much shorter, which has allowed them to reduce weeks of cover even more.
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Mark Erceg: And so from our view of weeks of cover, we believe that largely the weeks of cover are in a good place. And we think retailers would be taking significant out of stock risk if they go lower on weeks of cover. To your question on if the consumption continues to go down, couldn't that allow because you maintain the same weeks of cover, could that allow another amount of inventory reduction? The answer to that is yes.
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Good morning, and welcome to Newell Brands' third quarter 2023 earnings conference call at <unk>.
This time, all participants are in a listen only mode.
After a brief discussion by management, we will open up the call for questions.
In order to stay within the time scheduled for the call. Please limit yourself to one question during the Q&A session.
Today's conference call is being recorded.
A live webcast of this call is available at IR Dot Newell brands Dot com.
I will now turn the call over to Sofia, Cintas, Vice President of Investor Relations Ms. <unk> you may begin.
Thank you good morning, everyone and welcome to L brands third 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'd like to inform you that during the course of today's call, we will be making forward looking statements, which involve risks and uncertainties actual results and outcomes may differ.
A 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 Form 10-Q, and other SEC filings available on our Investor Relations website for further discussion of the factors affecting forward looking statements.
Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP explanations of these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures.
It can be found in today's earnings release and tables that were furnished to the SEC.
And now I'll turn the call over to Chris.
Thank you Sir good.
Good morning, everyone and welcome to our third quarter call we.
We had mixed results in the third quarter, we made significant progress delivering against the five major priorities. We established at the start of the year as well as deploying and Actioning the new integrated corporate strategy at the same time, we were disappointed core sales declined nine 2% during the quarter.
Let me take these each in turn starting with the five priorities, we laid out at the start of the year.
Mark Erceg: But it's not going to be anywhere near the magnitude of what we've seen over the last nine to 12 months on the pricing question. And I think that we have largely led pricing because we are the market leading brands and most of the categories in which we compete. Now, I would say broadly, we've seen competition follow for the most part because everybody was dealing with the same input cost inflation and there wasn't really an opportunity for them not to follow.
First year to date, we delivered excellent results on operating cash flow, which improved more than $1 $2 billion versus last year, largely due to significant progress on inventory reduction.
The stronger than anticipated performance, thus far has given us confidence to raise our outlook on cash flow for the full year.
Second during the third quarter gross margin reached an inflection point, expanding 170 basis points year over year with the fuel productivity program, along with pricing serving as the driving force. We continue to expect record productivity savings in 2023 with year over year gross margin improvement continuing into.
The fourth quarter.
Third we completed the project Phoenix organization design changes with all markets moving to the one novel approach. We are on track to realize $140 million to $160 million of pre tax savings this year and $220 million to $250 million on an annualized basis.
Fourth we are moving at pace with the simplification and SKU count reduction work across the organization and are on track to end the year with less than 25000, Skus down from about 28000 last year and over 100000 at the end of 2018.
Finally, the new operating model with three segments, our centralized manufacturing and supply chain and our one neural approach with our top four customers and across the geographies is now fully in place and starting to pay dividends.
US concrete example of how we're already creating and leveraging scale under a one will approach as the difficult but necessary actions taken during the third quarter to right size the manufacturing labor force across selected sites.
Those actions, which would have not been possible previously due to the way Noel was organized are expected to yield about $50 million in annualized cost savings.
The challenging macroeconomic background continued to weigh on normal top line during the third quarter, reflecting soft demand for discretionary and durable products.
Persistent inflation on everyday goods normalization in category trends post COVID-19 tight inventory management by retailers as well as the unfavorable impact from the bankruptcy of bed Bath and beyond.
We estimate that about 80% of the sales decline was driven by category declines and retailer inventory actions power.
However, there was a meaningful portion of our sales compression that traces back to gaps in our front end consumer facing capabilities or was the direct result of the July 1st pricing actions, we took to proactively address situations, where our structural economics were untenable.
That is why since my appointment in May we have placed so much emphasis on developing a robust set of corporate business unit functional and brand specific strategies all of which were fully informed by our brutally honest capability assessment to guide our approach in the years ahead.
At its core our new strategy focuses on improving the company's consumer facing capabilities, while distorting investment to our top 25 brands in top 10 markets and building on the strengthened operational and organizational foundation, we have built over the past several years.
Following the deployment of our new strategy in June we've taken decisive actions to bring the new strategy to life in several ways first.
To put consumer understanding and insights at the center of everything we do we have reinvented the consumer insight function and overhauled news innovation process around a biannual review process. This new process has been established to identify strong consumer driven propositions on our top 25 brands.
Mark Erceg: However, there are selective cases and selective businesses where we priced and competition has not fully followed and we are monitoring those situations. And if we need to, we will react appropriately to make sure that we're maintaining our market share.
With a focus on creating fewer bigger and longer and longer lasting innovations that our gross margin accretive as part of a comprehensive tiered product launch system designed to get consumer relevant innovation into market faster <unk>.
Operator: Thank you.
Operator: 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.nullbrands.com. You may now disconnect. Have a great day.
Consistent with this and to ensure we are being choice full and driving the strategy and the execution. We are taking swift action relative to the exit of smaller non core brands. We are moving at pace and expect to finish the year with a tighter more focused brand portfolio comprised of about 60 Master brands versus 80 at the start of this year.
Operator: Thank you for your time, and I'll see you in the next video. .
Operator: Peter Grom, Lauren Lieberman, Christopher Barnes, Olivia Cheang, Filippo Falorni, Christopher Barnes, Olivia Cheang Peter Grom, Lauren Lieberman, Christopher Barnes, Olivia Cheang, Filippo Falorni, Christopher Barnes, Olivia Cheang, Filippo Falorni, Peter Grom, Lauren Lieberman, Christopher Barnes, Olivia Cheang, Filippo Falorni, Peter Grom, Lauren Lieberman, Christopher Barnes, Olivia Cheang, Filippo Falorni, Good morning, and welcome to Newell Brands' third quarter 2023 earnings conference call.
Operator: At this time all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions.
Sure.
Second to dramatically improve brand building and brand communication and as we strive to build brand management into a foundational capability, we replaced close to half of Newell's brand managers over the past several months and put exceptional performance standards in place, which set clear kpis driven.
Sofya Tsinis: In order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. Today's conference call is being recorded. A live webcast of this call is available at ir.nullbrands.com. I will now turn the call over to Sophia Sinis, Vice President of Investor Relations.
Sofya Tsinis: Miss Sinis, you may begin. I would like to inform you that during the course of today's call, we will be making forward-looking statements which involve risks and uncertainty. Actual results and outcomes may differ materially and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release. Our form 10K, Form 10Q, and other SEC filings available in our Investor Relations website for further discussion of the factors affecting forward-looking statements.
<unk> for all brand managers going forward. In addition, we recently implemented important changes to the process and structure of our marketing and digital organizations to unlock quicker decision, making drive accountability and improve our ability to drive stronger purchase intent across our top 25 brands.
Sofya Tsinis: Please also recognize that today's remarks will refer to certain non-GAP financial measures, including those we refer to as normalized measures. We believe these non-GAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAP. Explanations of these non-GAP measures and available with consultations between GAP and non-GAP measures can be found in today's earnings release and tables that were furnished to the SEC. Thank you and I will turn the call over to Chris. Thank you, Sophia.
Third key members of neural sales team has been tasked with leading new business development, where they will leverage <unk> scale and extensive portfolio of leading brands to identify and pursue incremental distribution opportunities with that within new accounts.
While the bulk of our selling resources will continue to maintain their focus on strengthening our partnerships and increasing distribution with existing customers.
Finally to properly Cascade Knowles integrated set of corporate where to play and how to win choices along with the new segment function in top 25 brand strategies key members of the leadership team and I have now visited eight of <unk> top 10 countries across North America, Europe, and Latin America.
Based in part on those interactions we have decided to bring in new strong talent to fill a crucial roles across several of google's businesses and geographies for.
For example, we recently hired new leaders for the home fragrance and kitchen businesses as well as new heads of Europe and France.
Before turning the call over to Mark I'd like to provide a little perspective on the back to school season since Thats always an area of interest.
Christopher Peterson: Good morning, everyone, and welcome to our third quarter call. We had mixed results in the third quarter. We made significant progress delivering against the five major priorities we established at the start of the year, as well as deploying and actioning the new integrated corporate strategy.
While predictions for the back to school season varied widely across the industry in aggregate the categories, where newell competes declined modestly with stronger market performance from retailers that put their support behind leading brands versus those that focused on private label offerings.
This backdrop several of our major brands such as Sharpie Expo grew market share, which we were excited to see that said gaining share in a down market is not a prescription for long term success.
Christopher Peterson: The same time we were disappointed core sales declined 9.2% during the quarter. Let me take these each and turn, starting with the five priorities we laid out at the start of the year. First, year to date, we delivered excellent results on operating cash flow, which improved more than $1.2 billion versus last year, largely due to significant progress on inventory reduction. The stronger than anticipated performance thus far has given us confidence to raise our outlook on cash flow for the full year.
Christopher Peterson: Second, during the third quarter, Gross Margin reached an inflection point, expanding 170 basis points, year over year, with the fuel productivity program, along with pricing, serving as the driving force. We continue to expect record productivity savings in 2023, with year over year, gross margin improvement, continuing into the fourth quarter. Third, we've completed the Project Phoenix Organization design changes, with all markets moving to the one new approach. We are on track to realize $140 to $160 million of pre-tax savings this year, and $220 to $250 million on an annualized basis.
That's why we are already incorporating the learnings from this season.
Most important of which is the role of our leading brands can play in driving category growth into next year's back to school plans with leading retailers.
Christopher Peterson: Fourth, we are moving at pace with the simplification and skew count reduction work across the organization, and are on track to end the year with less than 25,000 skews, down from about 28,000 last year and over 100,000 at the end of 2018. Finally, the new operating model with three segments, a centralized manufacturing and supply chain, and a one-nual approach with our top four customers across the geographies, is now fully in place in starting to pay dividends.
While there are parts of <unk> portfolio, where we are gaining share that's not the case broadly this highlights why we needed to make a major pivot in the company as front end strategy.
While we are dissatisfied with our current sales performance, we did say at the Deutsche Bank Conference in June that we expected our top line performance to be below our evergreen target of low single digits for the next four to six quarters.
Christopher Peterson: The most concrete example of how we are already creating a leveraging scale under a one-nual approach, is the difficult but necessary actions taken during the third quarter to right size the manufacturing labor force across selected sites. Those actions which would have not been possible previously, due to the way NULA was organized, are expected to yield about 50 million in annualized cost savings. The challenging macroeconomic background continued to weigh a NULA's top line during the third quarter, reflecting soft demand for discretionary and durable products amid persistent inflation on everyday goods, normalization and category transpose COVID, tight inventory management by retailers, as well as the unfavorable impact from the bankruptcy of Bed Bath and Beyond.
And that and as the bulk of our new capabilities ramp up we remain fully committed to returning the company to top line growth.
Back in June and during our last earnings call. We also reiterated that our top financial priorities for 2023, we're strengthening cash flow and improving gross margin and very good progress is being made on both of those fronts.
Christopher Peterson: We estimated about 80% of the sales decline was driven by category declines and retailer inventory actions. However, there was a meaningful portion of our sales compression that traces back to gaps in our front-end consumer facing capabilities, or was the direct result of the July 1st pricing actions we took to proactively address situations where our structural economics were untenable. That is why, since my appointment in May, we have placed so much emphasis on developing a robust set of corporate business unit functional and brand specific strategies, all of which were fully informed by our brutally honest capability assessment to guide our approach in the years ahead.
Christopher Peterson: At its core, our new strategy focuses on improving the company's consumer facing capabilities while distorting investment to our top 25 brands in top 10 markets and building on the strengthened operational and organizational foundation we have built over the past several years. Following the deployment of our new strategy in June, we've taken decisive actions to bring the new strategy to life in several ways. First, to put consumer understanding and insights at the center of everything we do, we've reinvented the consumer insight function and overhauled new innovation process around a bi-annual review process.
So while there are certainly much more work to do ahead of US. The strategy is starting to take shape. That's why we are confident that this year free cash flow productivity will exceed our evergreen target of about 90% and the business will continue to improve sequentially next year as measured by gross margin expansion and the number of top 20.
Christopher Peterson: This new process has been established to identify strong consumer-driven propositions on our top 25 brands with a focus on creating fewer, bigger, and longer-lasting innovations that are gross margin of credo. As part of a comprehensive, peered, product-law system designed to get consumer-relevant innovation into market faster. Consistent with this and to ensure we are being choiceful in driving the strategy and execution, we are taking swift action relative to the exit of smaller, non-core brands.
Five brands growing market share as we operate rationalized and execute our new strategy to significantly improve our financial performance. We have been laser focused on implementing the organizational operational and cultural changes required to strengthen the companys front end consumer facing capabilities while harnessed.
The scale and power of one Noel.
Christopher Peterson: We are moving at pace and expect to finish the year with a tighter, more focused brand portfolio comprised of about 60 master brands versus 80 at the start of this year. Second, to dramatically improve brand building and brand communication, and as we strive to build brand management into a foundational capability, we replace close to half of rules brand managers over the past several months, and put exceptional performance standards in place, which set clear KPI-driven expectations for all brand managers going forward.
While the path forward will not be a straight line, we remain confident <unk> financial performance will improve and significant value will be created over time for our stakeholders.
I'd like to thank our leaders and employees for their hard work perseverance and dedication amidst significant organization changes and for their unwavering commitment to our purpose of delighting consumers by lighting up everyday moments I'll now hand, the call over to Mark. Thanks, Chris Good morning, everyone third quarter net sales and <unk>.
Core sales both declined approximately 9% largely due to the same macroeconomic headwinds we've been wrestling with since the third quarter of last year. However.
Christopher Peterson: In addition, we recently implemented important changes to the process and structure of our marketing and digital organizations to unlock quicker decision-making, drive accountability, and improve our ability to drive stronger purchase and time across our top 25 brands. Third, key members of NULL sales team have been tasked with leading new business development, where they will leverage NULL scale and extensive portfolio of leading brands to identify and pursue incremental distribution opportunities within new accounts.
However on a more positive note, we continued to make significant progress improving the structural economics of the business during Q3 with Newell's normalized gross margin, improving 170 basis points versus last year, and 140 basis points sequentially to 31, 3%.
A 500 basis point contribution from fuel productivity savings and meaningful pricing actions taken across roughly 30% of our U S business, primarily in the home and commercial space more than offset the significant headwinds from inflation and fixed cost absorption.
Christopher Peterson: While the bulk of our selling resources will continue to maintain their focus on strengthening our partnerships and increasing distribution with existing customers. Finally, to properly cascade NULL's integrated set of corporate wear-to-play and how to win choices, along with the new segment function in top 25 brand strategies. These key members of the leadership team and I have now visited eight of NULL's top 10 countries across North America, Europe, and Latin America. Based in part on those interactions, we have decided to bring in new strong talent to fill crucial roles across several of NULL's businesses and geographies.
Despite excellent productivity work by the team as well as strong savings from project, Phoenix, which amounted to $49 million in the quarter normalized operating margin contracted 220 basis points versus last year to eight 2%.
Most of the contraction in third quarter normalized operating margin was driven by higher incentive compensation charges. As you may recall incentive compensation was revised sharply lower during Q3 last year, making current period comparisons very difficult.
Christopher Peterson: For example, we recently hired new leaders for the home fragrance and kitchen businesses, as well as new heads of Europe and France.
During the third quarter net interest expense increased $12 million versus last year to $69 million due solely to higher interest rates to get net debt was down nearly $500 million year over year and down nearly $400 million and year to date.
Christopher Peterson: Before turning the call over to Mark, I'd like to provide a little perspective on the back-to-school season since that's always an area of interest. While predictions for the back-to-school season varied widely across the industry, in aggregate the categories where NULL competes declined modestly with stronger market performance from retailers that put their support behind leading brands versus those that focused on private label offerings. Against this backdrop, several of our major brands, such as Sharpie and Expo, grew market share, which we were excited to see.
The discrete tax benefit originally expected in the fourth quarter was cash.
Christopher Peterson: That said, gaining share in a down market is not a prescription for long-term success. That's why we are already incorporating the learnings from this season, the most important of which is the role our leading brands can play in driving category growth in the next years back to school plans with leading retailers. Well, there are parts of Noel's portfolio where we are gaining share. That's not the case broadly. This highlights why we needed to make a major pivot in the company's front-end strategy.
Christopher Peterson: While we are dissatisfied with our current sales performance, we did say at the Deutsche Bank Conference in June that we expected our top line performance to be below our evergreen target of low single digits for the next four to six quarters. Beyond that, and as the bulk of our new capabilities ramp up, we remain fully committed to returning the company to top line growth. Back in June and during our last ordinance call, we also reiterated that our top financial priorities for 2023 were strengthening cash flow and improving gross margin and very good progress is being made on both of those fronts.
Christopher Peterson: So while there are certainly much more work to do ahead of us, the strategy is starting to take shape. That's why we are confident that this year, free cash flow productivity will exceed our evergreen target of about 90%. And the business will continue to improve sequentially next year, as measured by gross margin expansion and the number of top 25 brands growing market share. As we operate, rationalize and execute our new strategy to significantly improve our financial performance.
Christopher Peterson: We have been laser focused on implementing the organizational operational and cultural changes required to strengthen the company's front-end consumer facing capabilities, while harnessing the scale and power of one rule. While the path forward will not be a straight line, we remain confident, new rules financial performance will improve and significant value will be created over time for our stakeholders.
Christopher Peterson: I would like to thank our leaders and employees for their hard work, perseverance and dedication amid significant organization changes and for their unwavering commitment to our purpose of bleeding consumers by lighting up everyday moments.
Mark Erceg: I'll now hand the call over to Mark. Thanks, Chris.
Mark Erceg: Good morning, everyone. Third quarter net sales and core sales both decline to approximately 9%. Largely due to the same macroeconomic headwinds we've been wrestling with since the third quarter of last year. However, on a more positive note, we continue to make significant progress improving the structural economics of the business during Q3, with new rules normalized gross margin improving 170 basis points versus last year. And 140 basis points sequentially to 31.3%. A 500 basis point contribution from fuel productivity savings and meaningful pricing actions taken across roughly 30% of our US business, primarily in the home and commercial space, more than offset the significant headwinds from inflation and fixed cost absorption.
Mark Erceg: Despite excellent productivity work by the team, as well as strong savings from project Phoenix, which amounted to $49 million in the quarter, normalized operating margin contracted 220 basis points versus last year to 8.2%. Most of the contraction in third quarter, normalized operating margin was driven by higher incentive compensation charges. As you may recall, incentive compensation was revised sharply lower during Q3 last year, making current periods comparisons very difficult. During the third quarter net interest expense increased $12 million versus last year to $69 million due solely to higher interest rates because net debt was down nearly $500 million year over year and down nearly $400 million year-to-date.
Mark Erceg: The discrete tax benefit originally expected in the fourth quarter was ca-