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

Good morning. I'm Ravi Saligram, President and CEO of Newell Brands. Joining me today is Chris Peterson, our Chief Financial Officer and President of Business Operations. We are truly delighted to be back at CAGNY. Today's presentation contains forward-looking statements. Actual results may differ materially due to the risk factors listed on the slide about and in our SEC filings from time to time. We'll also be discussing non-GAAP measures, for which you can find available explanations and reconciliations in the appendix to the slides and our website. So let me kick it off by giving you some key themes of what you will hear today. First, we are focused on sustaining core sales growth and gaining market share. We are closing margin gaps versus benchmarks. We're driving strong cash flow to drive balance sheet improvement. We're raising the bar on complexity reduction and improving our cash conversion cycle dramatically. And importantly, we are unifying our employees behind our noble purpose and values. So let's take a quick glance at Newell's profile: $9.4 billion in sales; 25 brands that accounted for 85% of our sales; our brands are in 90% of households; e-commerce is a big factor, 22% of global sales via e-commerce; and 1/3 of our business is international. So this team is all about delivering on our promises. As my friend Chris says, 8 out of 8. So look at 2020. Guidance, you see on the left, our results on the right. Every case, we either made or exceeded our guidance. I'm particularly excited that we got 30 bps improvement on operating margin, EPS of $1.79, up nearly 12% versus prior year on continued operations, and a whopping $1.4 billion in operating cash flow. Wow, that felt good. So let's now talk about our turnaround and how it's gaining momentum. We have strengthened our portfolio. Evidence of this? Our most profitable business is Writing. And in 2020, it was soft due to the pandemic, but our other businesses were able to overcome that softness, and we delivered great results. We came with great growth on our businesses like Food, which is up 25% in 2020. Appliances, Commercial, all did very well. So they were able to offset some of that softness in Writing. So you can see we have an enduring portfolio. We created a template now, with second half showing a return to growth, so that bodes well for longer-term sustainable profitable growth. We improved margins through a big focus. We mentioned FUEL at last CAGNY, our productivity initiative. And we delivered 4% COGS improvement. And we controlled our overheads. We delivered a 100 bps reduction in overheads. And we simplified the company and drove operating margin improvement. Our cash efficiency was great. We had strong free cash flow productivity, 154%, and a significant reduction in the cash conversion cycle. And importantly, we have a terrific team that is winning. So as we look forward, the themes continue: returning to growth; innovation; market-leading cash flow and productivity of cash flow; deleveraging down to 3x, which is our long-term objective; and creating a winning culture, which we're in the process of doing. But one theme is new, which is more focus on international because we think it abounds in opportunity. Let me just give a little color on that. Our portfolio is concentrated in 10 countries. And these 10 countries are a super majority of our sales. But we have great franchises in certain businesses. Appliance is very strong in Latin America, which grew double digits, by the way, in 2020; Australia and New Zealand, also double-digit growth in 2020 and also strong in Appliances; Writing, strong in Europe, as is our Commercial business. But it's all individually business-oriented because each business went on its own. We have an opportunity to consolidate and make this a cohesive whole so that we lead as Newell and take advantage of the leverage. For instance, our Food business is really not much in Latin America or Europe. How do we take Newell's clout and really drive some momentum? So a lot of opportunity. There's fragmentation in our markets in international. So we think we can reduce overheads and turn on growth. So that will be the extent to which we talk international. At next CAGNY, we'll come back and give you a detailed report on our progress. At last CAGNY, I talked to you about our new go-to-market strategy, which we call the 5 Cs: a culture of winning, which is all about now operational excellence through teamwork; consumer first, about insights, trends and meaningful innovation; customer collaboration, where we are creating value jointly, and we need to improve our service reliability; channel management, all about superior customer experiences through omni focus; and continuous improvement and innovation. So big part on supply chain optimization and creating product innovation platforms that go across businesses. So our first C, culture of winning. The leadership team is now pretty much complete with the exception of a Chief Digital Officer, and I hope to announce that in the first quarter. The team has come together. They've done a marvelous job during COVID, and many have had to onboard just online. But our team has been undaunted. They have driven forward a real culture, beginning to focus on diversity, inclusion, belonging, and it's all about the team. Second, consumer first. I'm very passionate about this. Because as a consumer packaged goods company, it has to be an obsession. We have to really design products to simplify and improve consumers' everyday lives. Because being discretionary products, it's all about moments of joy, peace of mind and confidence. And for that, we'll need advanced consumer insights to help us understand the role our products play and anticipate trends. We'll need to be bold on form, packaging, colors and functionality. Importantly, it's not enough just to innovate. We have to scale our innovations and scale them and improve our gross margins. Very critical. So with that, our innovation framework, we are evolving, where it's not just business unit-focused but really enterprise platform innovation. How do we get ideas from one business to another? We have many technologies. How do we get these forward? And we're doing that. I've just appointed a VP of R&D, who will focus on enterprise platform innovation. And we're very excited about whether it's sensory technology, IoT, there are lots where Newell can really build the chassis of innovation. And it's all showing up, this consumer focus. Half of our top 10 brands grew sales in 2020, half, led by brands like Rubbermaid; Graco; Coleman; FoodSaver, which joined the top 10 club; and Oster, given its strength in Latin America. We are well positioned for lasting consumer trends. There are 4 big trends going on in this space. The home is at the center of it, starting with the kitchen. A lot of focus. People, our consumers are into cooking, baking, grilling and because that is therapeutic and they feel a sense of accomplishment. And millennials, in particular, are using this, driving this and putting it on Instagram and creating communities to exchange and create connections. Cooking is the new connector. Home well-being, personal well-being are all becoming very important. During a time of stress, home wellness, hygiene, personal wellness is all becoming critical. And for that, we've got products like Yankee Candle, creating serenity; and products like Sunbeam, which is into pain relief. And home improvement. Right now, big thrust on home improvement. People are into decorating their houses, improving their homes. Kantar studies and other studies have shown that over 60% are now focusing on this. And we have great products in Commercial that are going after this. And then the call of the outdoors. As you get cooped up at home, people want to be outside. 8 million new campers came into the Outdoor segment, which is apropos that Coleman, in its 120th year, took advantage of this, innovated in the tent category, in the cooler category and actually returned to growth. We are seeing new users in many of our categories. In Ball, for instance, 50% more new users, 80% more new users for FoodSaver. And that's very important because when you sell a machine, and we sold thousands and thousands in 2020, 3 bags get sold, so it's a razor-razor blade story. Now let us talk about customers. Because to ultimately delight the consumer, you need great customer partnerships. When I started, I went on a listening tour and a customer said to me, "Hey, we're happy that Newell is beginning to go on the upswing, but what we can't have is 8 different businesses giving us different messages." So we appointed a Chief Customer Officer for Newell, who is now creating Newell-focused message and building top-to-top relationships. We went further than that. We have appointed an omni-channel General Manager at Walmart and a General Manager of Amazon, and we'll continue to do that. So that is really resulting in great joint business planning, and we are leveraging our omni capabilities there. And we're putting a lot of focus now on how do we get our OTIF levels up, how do we improve our customer service levels. And there's tremendous opportunities for us to expand distribution into the grocery channel and the dollar channel, the club channel and the home improvement channels. We are starting from a base of great strength as the world is moving towards e-commerce, where that's a competitive advantage. In 2020, our global penetration of e-commerce was 22% of our global sales, almost double that of 2018. But Baby, for instance, is almost 60%. But other businesses are catching up like home appliances and outdoor. And we have plenty of opportunity in Food and Home Fragrance. So this is going to continue to be an area of growth for us. E-commerce is the backbone for omni-channel prowess. Because today, the consumer has choices on when to shop, where to shop, how to shop, and we need to be there at all the touch points and deliver integrated 360-degree marketing campaigns focused on the end-to-end consumer and shopper journey. We need to distribute more content with faster cycle times, focusing on ratings and reviews. And we are strengthening our fulfillment capabilities and developing expertise in things like drop-ship and launching and leveraging social media and expanding the brand ambassador program following its launch last year and integrating our brick-and-mortar and online teams, our sales teams, to deliver the right omni-channel focus for our customers and the appropriate assortments. So innovations. We already talked about this in the earnings call, but I'm so excited. We are beginning to get momentum. As shown on the slide, our 7 businesses and the innovations from each one of them, taking advantage of the trends, whether it is the Rubbermaid steel trash can that you see with the home decor trend; or the iced coffee maker that is scaling and #1 SKU in many customers right now, taking advantage of the millennial boom on iced coffee; the dome tents that we talked about as the new users are coming in, 5 minutes to put it together. So that's great. And of course, Rubbermaid Brilliance. This sub-brand doubled in 2020 with Rubbermaid Glass, and now we're launching into pantry. And we're coming out with a great signature collection on Yankee Candle. So all of this, what does this mean, our great marketing, our great balance? We are beginning to grow share. Look at those 8 categories where we're really getting market share, and that's the strength of the brand. Whether it's Graco in car seats and travel systems or Coleman in tents and coolers or writing with S-Gel in pens or Dymo in labeling or with vacuum sealers and canning with FoodSaver and Ball, we're getting market share. So all of that is resulting in top line growth. So you can see in 2020, first half, we're down 9.2%, 6% growth in the second half of 2020. But look at that sequential improvement over time, down 5% in 2018. In 2021, we're saying we'll get to low single-digit growth. And we can see this in POS. Consumption, second, third, fourth quarter all grew in the U.S. And the good news, in January, continuing to grow. Importantly, we're even seeing growth in Writing. That is good news, folks. So let me end my presentation. We're talking about, what does this all mean, this evolution? It's all about driving shareholder value. And we have a simple model, which we are cascading into the organization because we want everyone's job to get connected to shareholder value creation. It all starts with core sales growth because that organic growth is the foundation and modernizing our brands and everything we talked about. The second is about gross margin expansion. Gross margin for me is the value and worth of a brand. And we are working hard, whether it's through productivity, through mix changes, sunsetting some of those stale brands that have low gross margins. We're very committed on gross margin. And overhead cost reduction, whether it's infrastructure improvements, process improvements, and really looking at rationalizing our retail portfolio on home fragrance, we're looking for efficiencies and getting our overheads down. All of that means operating margin expansion. We talked about our evergreen model. Chris will talk to you again about it but 50 bps, we're confident of it. And strong cash flow, strong cash flow and strong free cash flow conversion through working capital reduction. And all of that means we can reinvest in our business. We can put -- deploy capital against projects that have great returns and pay back one or 2 years and still keep the company asset-light. And that is a virtuous circle that will drive shareholder value. So let me conclude by saying our top priorities as we go into 2021 and beyond is sustained top line growth; strengthen and modernize our brands through insights and innovation; focus on omni-channel initiatives; begin to unlock our international opportunities; focus on complexity reduction, efficiency and productivity and take it to the next level; and continue to improve on the cash conversion cycle; and importantly, galvanize and unify our employees, foster a collaborative, inclusive culture onwards and upwards. Thank you very much. Now I'll hand it over to my friend and partner, Chris Peterson, the king of efficiencies and our billion-dollar man.

Thanks, Ravi. Good afternoon. It is good to be with you virtually today. Our decision to accelerate the turnaround plan in the back half of the year drove excellent progress on each of the 5 pillars and key value-creation drivers. We are 2 years into the turnaround and have come a long way in strengthening the financial performance and operational effectiveness of the company. When we were at CAGNY last year, we had just reported a normalized operating margin for 2019 of 10.8%, which was up from 9.1% in 2018. In 2020, we continued to drive improvement despite the headwinds we faced throughout the year. In fact, in 2020, our normalized operating margin expanded 30 basis points year-over-year to 11.1%, a 200 basis point expansion relative to the 2018 level, reflecting strong progress on overheads and complexity reduction, significant savings from our FUEL productivity program, benefits from restructuring actions as well as our decision to retain the Commercial business. We expect to continue to drive improvement in 2021. Our outlook for this year calls for normalized operating margin improvement of 30 to 60 basis points year-over-year to 11.4% to 11.7%, in line with our evergreen model. Although our gross margin took a step backwards in 2020 due to the headwinds from COVID-related costs, business unit mix and inflation, we made good progress strengthening our FUEL productivity program and reducing complexity. We continue to push forward toward the benchmark of 37% to 38%, which represents a 400 to 500 basis points opportunity. To go after the gross margin opportunity, we are focused on price and mix management, productivity, manufacturing plant and distribution center network consolidation, SKU complexity reduction, launching margin-accretive innovation in the categories in which we compete and automation. We expect to drive meaningful improvement in gross margin in the coming years, starting with 2021. FUEL is a significant enabler of our margin goals, and we have made tremendous progress in instituting a culture of productivity at Newell. In 2020, we increased FUEL productivity savings by 35%, achieving about a 4% reduction in our cost of goods sold base year-over-year. This is the best annual result we have delivered since we started tracking the measure and amongst best in class in the industry. The organization has truly embraced these efforts, which target procurement savings, manufacturing efficiencies, enhanced planning actions, product value engineering and distribution and transportation savings. We have a strong pipeline of projects in place for 2021 and are targeting a 3% to 4% reduction in our cost of goods sold base. While in 2020, productivity savings were masked by COVID-related headwinds, in 2021, we expect FUEL to drive gross margin improvement. 2 years ago, we identified SKU reduction as a meaningful opportunity for Newell brands, which unlocks more efficient purchasing, operations and demand planning. Progress in this area has exceeded our expectations as we accelerated our actions during the pandemic. Our starting point on SKUs was about 102,000 in 2018. We made significant progress in both 2019 and 2020. We exceeded our initial target of 50,000 SKUs a year early and exited 2020 with 47,000 SKUs. Effectively, we have doubled our revenue per SKU over the past 2 years. Importantly, we believe this effort will lead to both stronger sales growth as it enables significantly better customer service and cost reduction. Since we surpassed our original goal, we are resetting the bar and targeting 30,000 SKUs by the end of 2022, an ambitious but achievable target. Another area that we expect to contribute to our gross margin progress is automation across our supply chain. We are still early in the process here, but we see significant opportunity for efficiencies and savings. The e-commerce robotics that we deployed in one of our distribution centers maximize picking efficiency. We deployed 80 robots, which improved our average pick performance in units per hour more than 300%. We've also deployed robots and collaborative robots or cobots in our manufacturing plants. We deployed 42 robots in 2020, and we're aiming to deploy more than 200 in 2021. The image on the right is of our Connected Home & Security plant in Juárez, Mexico, where we've deployed 6 robots to date. The return on investment for these projects is high double digits with paybacks in the 1- to 2-year time frame. Moving on to overheads. We continue to drive overhead efficiencies through complexity reduction, tight cost controls and restructuring savings. I'm happy to report that we lowered our overhead as a percent of sales by another 100 basis points in 2020, getting to 18%, very close to the level of 16% to 17% benchmark. We made significant strides on complexity reduction across the company. Since 2018, we have completed 8 ERP migrations. As of 2020, 86% of our sales are now on 2 ERP platforms, and we expect to get over 95% of our business on 2 ERP systems in the next 2 years. We've closed 13% of our office locations; rationalized nearly 90% of our IT applications, ending 2020 with less than 800 apps; removed 6% of our legal entities; and since 2019, reduced the number of our domestic suppliers by 75%. Complexity reduction contributed to the $160 million year-over-year reduction in overhead costs in 2020. As we look forward, we see ample opportunity to continue to simplify our operations and drive further efficiencies. We continue to make progress on digital tech replatforming, which fundamentally changes the way the company interacts with consumers and further enables complexity reduction across the organization. 2 years ago, in the U.S., we had about 290 websites, many of which were on outdated technology. We rationalized that down to 40 ongoing websites in 2020, with 88% of our U.S. websites now on the new platform. Through the new platform, we're able to deliver higher-quality, more engaging and impactful consumer experiences. We've seen reductions in page load times, enhancements in user experience, lower bounce rate and better conversion rates across our websites. This has been a key enabler to both accelerating our e-commerce sales growth and driving cost efficiency. We expect to have 100% of our U.S. sites on the platform by the middle of this year, and we will begin the international phase in the back half of 2021. Moving on to cash. When I presented at CAGNY 2 years ago, I shared with you that our cash conversion cycle was 115 days. That positioned us squarely as the worst in the industry and provided us with a meaningful opportunity for improvement. We've made significant progress in lowering it. In 2020, we shortened the cash conversion cycle by about 26 days to 72 days, which is very close to our original benchmark target of 70 days. This benchmark was based on a median composite analysis of peer companies. Based on our performance today, we are now setting a more aggressive target of 50 days as we aspire to move toward best in class amongst our peers. Over the last 2 years, we took aggressive action to address all components of working capital as we renegotiated contracts with our suppliers, improved receivable collection processes and significantly reduced SKUs and implemented integrated business planning and advanced analytics. We will continue to focus on every element of working capital to move toward the new, more ambitious target. 2020 was an exceptional year of cash delivery. Operating cash flow improved $388 million year-over-year to $1.4 billion, and free cash flow was up more than 50% to $1.2 billion. For the second year in a row, the company's free cash flow productivity exceeded 100%, which is our evergreen target. In fact, in 2020, we significantly increased free cash flow productivity to 154%. This is a major achievement for the organization, which continues to rally behind our working capital initiatives. In 2021, we expect to generate operating cash flow of approximately $1 billion as we expect to make further progress on reducing our cash conversion cycle despite a lower year-on-year benefit from working capital. We are in a much stronger balance sheet position today than we have been in a very long time. We ended the year with a net debt-to-EBITDA leverage ratio of 3.5x versus 4.0x at the end of 2019. We reduced net debt by $748 million in 2020, and we expect to get very close to our target leverage ratio of 3.0 by the end of this year. Let me remind you of our evergreen model. These are not annual goals but metrics we aspire to achieve on average over the long term. Some years, our performance will be above our targets; in some years, they will be below based on macroeconomic factors and investment opportunities. Our targets are: delivering core sales growth in the low single-digit range, slightly ahead of market growth; annual operating margin improvement of 50 basis points; free cash flow productivity north of 100%; and reaching a 3.0 leverage ratio. Our 2021 guidance is in line with our evergreen targets for each of these metrics. Let me finish where Ravi started, which is with our key messages for today. First, we are focused on sustaining core sales growth and gaining market share. Second, we are closing margin gaps and moving toward our stated benchmarks. Third, we expect to continue to generate strong operating cash flow, driving balance sheet improvement. Fourth, we are raising the bar on SKU reduction and cash conversion cycle targets as a result of terrific results in these areas in 2020. Finally, we are focused on continuing to galvanize and unify our employees behind our purpose and values. We are very proud of our results and see considerable value creation opportunity ahead. With that, we'll now open up for questions.