Newell Brands Inc. (NWL) Earnings Call Transcript & Summary

Next up this afternoon, we're pleased to welcome Newell Brands. If -- at 1Q results, the feeling listening to Newell's call was that the company just couldn't catch a break given the litany of COVID-19 headwinds impacting its business, with 2Q results, we can begin to see that some of its categories are well situated for when consumers are spending more time close to home. Today, we're lucky enough to have the company's CEO, Ravi Saligram; and CFO, Chris Peterson, with us in the conference this year. Ravi and Chris, thanks so much for joining us.

Thanks, Samira.

Samira, thank you. I'm delighted to be here. Let me start here with Nancy's surgeon general's warning about forward-looking statements and moves quickly along. And so good afternoon, ladies gentlemen, and hope you're all keeping safe. We're coming to from Atlanta. And let me kick off by highlighting some key messages and things you'll hear throughout our presentation. So overall, despite COVID, in a recessionary environment, Newell Brands is on the move and gaining momentum. We are seeing strong progress on restoring top line growth potential. Closing margin gaps was at page front, significantly improving cash flow generation and a strong and experienced leadership team in place, and that's making excellent strides in reducing complexity. So let me refresh your memories about Newell. We're a $9 billion plus company with 25 iconic brands that are penetrated in more than 90% of U.S. households. 1/3 of our business is concentrated in 10 countries, and that's our international business. So as in the first half of 2020, our focus was COVID-related. We focus on employee safety, getting our plants, keeping them running and building up liquidity up to $2 billion per day in the second quarter. In the second half, we've pivoted to accelerating the turnaround. We've built a best-in-class leadership team squarely focused on recycling growth through innovation and go-to-market execution. At the same time, we are laser-focused on cash flow generation, improving productivity, reducing overheads and simplifying the company to reduce complexity. I am very proud of your leadership team, new hires as well as veterans who become a cohesive group. This team has domain expertise, they have consumer and customer focus, they are team players and experienced at leading terms. Changes to my leadership team are now complete with one last hire pending, which is ahead of e-commerce. Now let's talk about growth. We are very pleased that in the U.S. in the last 4 weeks, 5 of our businesses are not only experiencing POS growth, but also for sales growth. And then takes this positive in POS and catching up on sales. Writing is the early business that is showing some temporary softness. And our Connected Homes business is experiencing supply constraints. That's how far allowed this. Our efforts in reigniting sales growth are truly paying on. Let's talk innovation. We're rejuvenating our brands for today's consumer, capitalizing on emerging consumer trends and needs and enabling cross-business platforms where 1 plus 1 equals 3. So we are looking at platforms like IoT and wellness and Hygiene and so on and seeing how can we drive this across our businesses. E-commerce is becoming a power and competitive advantage as a social media and marketing. We are working hard to improve the digital IQ of our businesses and becoming a true omnichannel player as we also look to accelerate not only Amazon, but also retail.com curve. We're closing gaps in terms of distribution in non-mass channels, grocery, dollar drop and working very hard on improving customer collaboration and execution. And internationally, our focus is on key drive countries and categories to build scale. We're already seeing green shoots of the underlying progress. Food and Commercial businesses. Our Commercial business is becoming really -- getting growth momentum. We are fortifying our innovation funnels and fast tracking new ideas, appliance and cookware, capitalizing on the trends as -- is the outgrow business. And we're elevating omnichannel capability. We really want to serve consumers, no matter which channel they choose to go to. Building a positive brand experience for consumers, where they shop, when they shop, how they shop and how the right product assortment [breakdown]. We are obsessed with better understanding and servicing our consumers on their end-to-end journey. And in the first half, a lot of these shoots were taking place, but masked a bit by the 9 percentage point sales headwind due to COVID-19. But we think, in the second half, things will get better. So let's talk about e-commerce. Our penetration in the first half of sales -- growing sales reached 21%. And in fact, in the second quarter, penetration was 24%, double that of 2018, and this penetration increase is seen across all our businesses. And we still have a lot of opportunity in many of our businesses to drive the penetration even more. And in the first half, our e-commerce sales growth was upwards of 30%. So you can see we are really leveraging our e-commerce capabilities. Our brands are well positioned for emerging consumer trends, whether it is cooking at home, which is -- right now, it started as a hygiene thing, but it now went to hobby and now the emergence of the home chef. So with our brands, like FoodSaver and Ball, we're seeing more and more consumption increases. We're leveraging cooking, baking and drilling with outdoor bills like Coleman and Campingaz, hygiene with Rubbermaid sanitizers and outdoor in our Coleman chains and road trips as people are now beginning to go out, break out every one with their kids needs car seats. And we're leaning into innovation to continue to build momentum towards really a star, and it's really on par. So I'm so pleased that everyone of our brands were gaining share. And it's maintained its growth momentum since the fourth quarter. And we're about to launch Rubbermaid Brilliance plants. And then we've come out with this. We're about to launch online Rubbermaid with antimicrobial protection, which we call the silver shield and that product was identified and spread to market in the past 6 months. So we're really focusing on being nimble and agile. Our commercial business, thank God we didn't sell this. It is off to a great start. So after some inconsistent performance, when it was not for sale, two consecutive quarters of core sales growth and our sanitizer business front virtually scratch and building off of our water platform, whether it's the Rubbermaid stands or a tabletop, we're now building $100 million sanitizer business over the next few years and scaling supply capacity on a global basis. In fact, this is going to be one of the fastest-growing organic businesses for Newell Brands. And Appliances & Cookware. Hey, in the past, quarter, yes, but now that team is clearly more going forward, taking -- leveraging that home share, look at our iced coffee maker, going after millennials, the oster blend rechargeable portable blender as people want to get to smoothies. And then with this diamond coating, new appliances. So core -- Appliances & Cookware, very excited that it returned to core sales growth in the second quarter. And POS is continuing to grow. So we're excited. It's global. It's Latin America. It's U.S. Exciting stuff. So now Writing, yes, temporary softness, but a great business. Like last year, 6 straight quarters of core sales growth through the fourth quarter of '19. And we drove innovation with Sharpie S-Gel, best-in-class business gel pen, uppish at 7 points, almost checkpoints. And yes, is there some issues? Yes. Why? Because of uncertainty? With school closures and online learning and offices being crossed, yes, that's been a bit of an issue. But we think it's temporary. Long term, this is a great business. And there's still -- even here we think BTS, back to schools should be elongated throughout the year. And we already saw that. Last week, first time since COVID, we actually had a POS growth last week. And over Labor Day, in some key retailers, we started seeing bounce up of performance and on core products like dry rice and on glue. So good stuff. We think it's temporary. So customers, we're really working on enhanced customer collaboration, driving new business wins, distribution wins. We've been listening, Mike Hayes, our Chief Customer Officer, our BU Head, myself. We've been talking for customers, understanding their pain points. We know we've got to work on our supply chain. We've got to make it simpler for them and easier for them to do business with us. Right now, very focused on fill levels. Get the fill levels and prepare for holiday. And so they've been rewarding us with distribution wins. So -- and exciting that our teams are mastering how to do, joining business plans and line reviews online. So going well there. So with that, let me just say that we are gaining growth momentum, Newell as a whole. We have seen 4 months, yes, 4 months of POS growth. In fact, year-to-date POS is up modestly. That's not all. The company returned for modest sales growth in June, and then that has continued -- sales growth has continued through August. So POS is up, sales growth is up, and we're happy. So we're encouraged by these trends. And I'm going to tell you we're optimistic that the second half will be better than our first half. So let me hand it over to Chris Peterson, who is going to continue the good news Newell story, talking about operational improvements and simplifying the company. Over to you, Chris.

Thanks, Ravi, and good afternoon, everybody. It's great to be back at the Barclays conference, although a little different being here virtually as opposed to in the Boston Harbor. When we put the turnaround plan in place about 1.5 years ago, we were focused on a broad agenda of operational improvements. And I wanted to highlight some of the accomplishments that we've got today because we're accelerating our progress in this. Specifically, we're focused on driving an increasing amount of productivity across the company in both gross margin and in overheads. We're focused on continuing to drive an accelerated pace of cash flow delivery, reducing our overhead costs and reducing complexity. At CAGNY, a year ago, we showed this chart that said in 2018, the company's gross margin was 35%. In 2019, we took a slight step backwards as a result of commodity cost inflation, foreign exchange and tariffs. But we said that the ultimate goal that we thought we could get to is 37% to 38%, and we very much see that goal in sight. We are making very strong progress on the underlying activities that can deliver us toward that objective. And I'll just give you a couple of progress reports here. So we started a program called FUEL that was focused on gross margin productivity. This is really across all elements of the supply chain. If you look at the progress that we're making this year versus last year. And last year, we had a pretty good year on FUEL. We're expecting to deliver 24% more gross margin productivity this year than we did last year from the FUEL program despite operating in a COVID environment. This progress was masked a little bit in the second quarter, but we expect this to come through much more strongly in the back half of the year as commodity cost, foreign exchange and tariff trends mitigate in the back half of the year versus what we saw in the front half of the year. Turning to SKU rationalization. This was a focus area for us when we put the turnaround plan in place. At the end of 2018, we had over 100,000 SKUs. Last year, we took out about 28,000. And I'm pleased to report that we're accelerating our progress this year. We've taken out 15,000 through the month of August. I just got the report yesterday and updated it in the chart here. And our -- and we're very much on pace to get down below 50% -- or below 50,000 SKUs for next year. We've taken 42% of our SKUs out through August over the past 1.5 years. What's more exciting than the left-hand side of this chart is the right-hand side of this chart. And what you can see on the right-hand side is that we've driven our average revenue per active SKU up by more than 50%, if you look at our revenue per se in the last 12 months versus what we started within 2018. And that is driving much more efficient purchasing operations demand planning and I think is going to position the company to deliver strong gross margin progress going forward. Turning to overheads. We did a similar chart at CAGNY a year ago. In 2018, the company had an overhead ratio that was 21%. We thought we could get down to 16% to 17% by taking a broad set of actions. In 2019, we drove 200 basis points of improvement and we are accelerating our pace of improvement this year. And I'll talk about some of the actions that we've taken. When the coronavirus hit, we took a fresh look at how we can go faster on overhead and complexity reduction. We initiated a zero-based budget review that allowed us to tighten discretionary spending, tighten T&E spending, that also resulted in us taking a restructuring action in the month of June that impacted about 4% of our professional headcount. We're converting 2 of our ERP systems onto our core ERP system this year. We're cutting 5% of our office locations. We're taking 33% of our IT applications out. And we're taking 9% of our legal entities out this year. In the first half of this year, the combination of these actions led to a year-over-year reduction in overhead cost of over $100 million versus the first half of that last year. And I expect this trend to continue as we get into the back half of the year. We're making very good progress on the digital technology replatforming. This is a broad program to fundamentally replatform how the company interacts with consumers and customers digitally. And this platform includes things like social listening, consumer insights and analytics, content management as well as our own direct-to-consumer websites. When we started the program, we had, in the U.S., over 290 websites, many of which were on outdated technology and really not showcasing the best of the company's brands. We've rationalized that down to less than 82 in 2019 with a plan of getting to 40. We have -- of the 40 ongoing sites, about 60% of them are now up on the new platform, and we'll have 100% of our sites up on the new platform by the middle of next year. The early evidence is exciting in this area. We're seeing significant reductions in page load times. Significant improvements in user experience, which is resulting in better balance rate and increased conversion across our websites. We're also seeing our e-commerce business. Much of this technology allows us to load our content on retail.com sites with some of our top retail customers. That process has gotten easier and more seamless and our content has gotten better. And as a result, we're growing our e-commerce business through the first half of this year at over 30%. And as Ravi mentioned, our penetration of e-commerce is now above 20% in the first half of this year. Turning to cash. We did a similar baseline in 2018. We started with a cash conversion cycle of 115 days. And I think when I was at CAGNY a year ago, I said that positioned us squarely as the worst in the industry, which I thought was a good thing because it meant we only have 1 way to go, and we started moving. And so we ended last year by taking 17 days out of our cash conversion cycle. I think we were the most improved company in 2019 going down to 98 days. And we did it really by focusing on all elements of the working capital value stream. The good news is the progress is continuing this year. So if you look at last year, we went from an operating cash flow in 2018 of $680 million to over $1 billion. We increased our operating cash flow in 2019 by over 50%. And if you look at the first half of this year, our operating cash flow in the first half of this year is up significantly versus last year, and we're running through the first 6 months of this year, an additional 20 days of improvement in the cash conversion cycle. I feel like we've got a very strong program that I think has legs to continue to deliver us toward that target. When you put it together, we are very optimistic in the long-term aspirational targets and the ability of us to get the company back, delivering against these targets over the coming years. These were the targets we talked about at CAGNY. We expect the company to get back to core sales growth in the range of low single digits. We expect the company to deliver, on average, about 50 basis points of operating margin a year improvement year-over-year. We expect the company to deliver free cash flow productivity above 100%. And with that free cash flow, we believe that we will delever the company and get down to a leverage ratio and net debt-to-EBITDA leverage ratio of about 3x. If I go back to the core messages, the company's financials are rebounding strongly. As Ravi mentioned, we've had 3 months in a row, June, July and August of core sales growth off of a very impacted April and May period. We're excited about the return of the company to core sales growth. We are making good progress at closing margin gaps versus benchmarks. We have improved and expect to continue to deliver strong cash flow generation and we now have, as Ravi mentioned, a strong and experienced leadership team in place to continue driving the progress across the enterprise. So with that, we will open up for questions.

All right. Thank you, Ravi and Chris. That was really helpful. So let's start with the topic that's certainly been on most people's minds. Given that retailers are calling out a lackluster back-to-school season, what actions are you taking to offset the impact on 2020 sales and operating income? And then also looking forward, are there any changes to your longer-term view on the category, particularly if remote working or learning becomes stickier?

So let me kick that off Samira. So as we mentioned, whether it's POS growth for Newell as a whole or sales growth in June, July, August, we said we had positive trends. And clearly, while writing is an important and profitable business, our other businesses are also kicking in and doing well. So the overall enterprise is doing well. We think that the Writing business issue is a temporary phenomenon affected largely -- or completely by COVID. And because of back-to-school and people staying at home and working from home, we do think that -- and we're already seeing -- so for instance, we did a ZIP code analysis, and we looked at ZIP codes where schools were open it in person, worst is just online, and we compare them in those ZIP codes. And clearly, where -- in the ZIP codes where there was in personal loan, we started seeing sales growth for riding. And now this last week, as I told you nationwide, we saw sales growth so being an elongated season, it could also mean that there could be another -- as colleges, if people return in person in January, towards the end of the year, you could have another pop. So to me, even in the short term, it's not negative, it's temporary. But in long term, this is a very strong business. We have some amazing brands, which are made -- paper made, and we're continuing the innovation stream. And also, if this becomes working from home -- more working from home is going to become a phenomenon, we're already working on innovations to account for that. So overall, I feel very good about the strength of the portfolio and feel pretty good about the second half of the year, and quite optimistic.

I would just add on the operating margin part of the question that we feel that the operating margin tailwinds are moving in our direction. So we're feeling more optimistic about progress on operating margins going forward from this point. And the reason for that is because if you look at commodities, foreign exchange and tariffs, which were a significant headwind last year, those things are much less of a headwind in the back half of this year. The -- as I mentioned in the prepared remarks, our gross productivity program is delivering at a much faster rate this year, and that's going to start to show through. We're making very strong progress on overhead cost reduction. And I expect overhead as a percent of sales to be down. And all of those are tailwinds to operating margin. The Writing business, in particular, is a higher-margin business for us. And so it does have a negative mix impact when that business is down in the short term, but the combination of the rest of the tailwinds has been feeling much more bullish about our operating margins going forward than what we experienced in the front half of this year.

And just think of 2021, when we've created normally momentum on the other businesses, but Writing gets back, Newell will be, of course.

That's great. And that actually leads me nicely to my next question. So you certainly are seeing very discrete tailwinds across categories because of people staying at home more, Appliances & Cookware, elements in Outdoor & Rec, and you've also described some exciting new innovations. Do you expect recent trends in consumer patterns to continue into 2021 and beyond? And then also, given your innovation pipeline, at what point do you think you'll get to the stage where you're gaining share in these trouble categories?