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

Good morning. My name is Bill Chappell. I'm the senior consumer analyst at Truist Securities here for Day 2 of the Truist Consumer Symposium. With us today are -- our first off is Newell Brands. Newell based in Atlanta, Georgia. It's a leading branded consumer company in categories such as camping, small kitchen appliances, writing. Its brand portfolio includes iconic brands such as Coleman, Mr. Coffee, Sharpie, Yankee Candle and Graco. In 2020, the company generated about $9 billion in sales, and its current market cap is around $10.2 billion. Our speaker today is Chris Peterson, the Chief Financial Officer and President of Business Operations for Newell Brands. Chris, I will let you read off your disclaimer, and then we'll jump into some questions.

Very good. Good to be with you, Bill. Before we get started, please note that today's remarks may include forward-looking statements about Newell Brands. Actual results may differ materially from these forward-looking statements due to factors listed in our SEC filings. And we've posted available explanations and reconciliations of non-GAAP measures on our website.

Thank you. I feel more safe as we go into this. Chris, I want to take a step back. Just -- you came in December of 2018 -- or December of, yes, 2018. And the company was battered, to say the least. And so, I won't say you were present at the recreation, but you were definitely present at the start of the turnaround. And I guess, in your view and taking nothing away from how it's done in the past, how did the company, which had gone through so many restructurings over a 2-decade period, like how did it get to this space? And what were the initial things you saw that needed to be fixed, like the low-hanging fruit? Because some would have thought that Newell and [indiscernible] Jarden had been run fairly well. They were good brands. They've gone through restructurings. And so, it should have been a fairly streamlined business. But there's a lot of work that has been done. And so, just tell us what kind of that first impression and first steps that the company took.

Sure. Thanks, Bill. And it's good to be with everybody this morning. If I go back to when I joined the company, as you say, a little over 2 years ago, the reason I joined the company was because I thought the company had terrific brands that were underleveraged and underperforming. And when I joined the company, that was certainly the case. So I spent the first couple of months doing a listening tour. And what I saw was, after the Newell and Jarden merger happened, I think the complexity of the number of businesses, the integration, sort of overwhelmed the management team that was there at the time. And then there were a series of organization moves that were made that basically didn't work, where there was a lot -- centralization in areas that shouldn't have been centralized and decentralization in areas that should have been centralized. And so I, together with the leadership team at the time, developed a turnaround plan, about 3 or 4 months into my journey at Newell. And it was really a back to basics turnaround plan that was focused on 5 things. The first thing was returning the company to profitable core sales growth. Second thing was driving operating margin improvement through gross margin improvement and overhead cost reduction. Third was unleashing and generating stronger free cash flow and operating cash flow. Fourth was improving the portfolio of businesses the company competed in. And fifth, last but not least, was reengaging the employee base and upgrading the talent level in key positions across the company. And I think, if you look over the last 2 years, we've made very strong progress on all 5 of those metrics. We've -- in the first year of the turnaround, we doubled the operating cash flow performance of the company in 2019. That cash progress has continued into 2020. We've improved our operating margins by over 200 basis points over the last 2 years. We've gotten the company now back to core sales growth in the third quarter of last year. We've completed divestitures of noncore businesses in 2019, so we're now operating with a much more stable portfolio. And importantly, we've upgraded the management team. We've brought in -- for our 8 businesses, we've brought in 4 new business unit CEOs, we've brought in a new Chief Customer Officer, we've brought in a new Chief HR Officer. We've also had Ravi Saligram join us as our Chief Executive Officer about a year into the turnaround plan. And importantly, when Ravi joined, he endorsed the turnaround plan. And so it's been a continuous focus that I think is starting to show through in the financial results.

That's great. And I think on that fifth one, I think I had heard at the time, 2, 3 years ago, that there had been a survey -- external survey done on morale, and it was one of the lowest that the externals -- one had ever seen. And so, it sounds like that's improved pretty meaningfully with you and Ravi kind of boosting the morale of the troops.

Yes. And in fact, it was interesting, the second week that -- I joined the company on December 3, and the second week that I was with the company, there was a management meeting at the time, and there was an employee survey that had been done inside the company. And the results came back and I got the results, and it was the worst I had ever seen in any job I've had in any company I've worked in. And so I looked at it and said, boy, there's -- it's bad because the morale is terrible. But there's only one way to go, and that's get better. And so we put a very strong effort. And what we saw in the survey was 2 things. One is, there was a lack of a clear strategy from the top of the company that employees felt connected to. So many employees said, "Hey, we don't know where the company is headed. I don't know how my work fits into that." And there was a feeling of the company was losing. If you look at today, we are in a totally different place. We now have a very clear strategy. The employees are very clear on how their individual work connects to that strategy. As I mentioned, we've brought in real domain experts to upgrade the talent level in key positions. And there's a feeling that we're back to winning, because we are driving sales growth, we're driving margin improvement, we're driving strong cash flow. And importantly, we're starting to gain market share in a lot of the categories in which we compete. And so, if we did the survey today, I think what you'd find is people feel much better about the company. In fact, one of our -- our audit firm, Price Waterhouse (sic) [ PricewaterhouseCoopers ] commented to the other day, that during the pandemic, there's some burn out from some of their clients, but Newell is different. People are excited to be working at the company. People really feel like they're part of something special. And so I think we're on the right track there.

Got it. And -- no, that sounds great. And one of the key parts of the reorg turnaround was SKU rationalization. And so, one, it's amazing that the company had 90,000 SKUs. But it's a big cut to do 45,000, and I believe you announced last week, we're now going to 30,000. Help us understand like the risks and opportunities of that, how you kind of come to a cut in half or now cut it by 2/3 type number without losing a presence at retailers, without losing in a category where you have -- need a certain amount of shelf space that's meaningful enough to drive foot traffic? I mean, how do you come up with that? And how do you come up with this number?

Yes. So -- and this is instructive of sort of the turnaround effort that we've done over the last couple of years. And it's a good example of how the company had lost focus on the basics. So when I joined the company, I went and did a meeting in Bentonville with Walmart. Walmart is the company's largest customer, with about 15% of our global sales are done through Walmart. And I asked the team in Walmart how many SKUs does Walmart carry in their largest store. And the answer is 1,500. And that 1,500 number of SKUs represents the vast majority of our product categories, with a pretty full assortment for consumers, because it's not like we're constraining the assortment for consumers to have relevant choices across our product categories. And so when you look at that number of 1,500, you might say, well, there is a role for differentiation for the club channel, maybe for the food channel. Maybe there's some differentiation that we need to have in some of the international markets. And you can multiply that math out and get to a number that's maybe 25,000 or 30,000. I went back and asked our team, well, how many SKUs are we offering in total? And the answer was nobody knew, because we weren't tracking it, which was the first problem. So we started off putting a tracking mechanism in place, and that's how we got to the approximately 100,000 type number. At the time, I wasn't sure what the right ultimate number is. So I put my thumb in the air and said we should be able to get down to 50,000, because if we're offering 1,500 at Walmart, 50,000 should be plenty for all of the other retailers and the international markets. And that was a bit of a gut feel guess on my part. We ended this last year at 47,000, which is ahead of the 50,000 target and a year earlier than what we were targeting. But importantly, over that time period, we've now put in place a much more rigorous data-based assessment. So we do what we call a magic quadrant analysis that we update every month that looks at revenue per SKU and gross margin per SKU and recalculates basically across the entire company portfolio. And when you look at that analysis, that analysis would suggest that now 30,000, we believe, is the right number. And so we've set a target to get there over the next 2 years. The other thing I would point out is that not only does this drive significant cost savings, because of purchasing scale, because of lower changeover times, because of less inventory, less scrap, all of those types of things, but it also is going to help us grow our sales faster. So I think there's a -- and the reason for that is because we were struggling for many years with customer service, filling customer service orders, because we were trying to produce the 100,000 SKUs. As we reduce our SKU count, our customer service level is going to go up. And that's going to allow us to reduce out-of-stocks in the stores, become a more preferred partner to our retail customers. So we actually think that this is both a revenue and a cost benefit for us going forward.

And talk a little bit about -- and we'll get more into the impact of the pandemic, but how that impacted the SKU rationalization, I mean, I imagine as people were clamoring for coffee makers that you haven't made in 5 years, it was a great way to clear out some inventory. But maybe just talk about how that -- both on your inventory, but also on -- I mean on working capital, but also on the SKU reduction and how that got to that plan.

Yes, exactly right. And when the pandemic first hit, we, like many companies, were focused on the health and safety of our workers, continuing to supply products through our supply chain and the financial stability of the company. We quickly pivoted after about 2 months into the pandemic back to the turnaround plan, and on SKU count and inventory we decided to go faster as a result, and really accelerate our progress. And the reason for that was what we were seeing was that, from a product availability standpoint, we really wanted to focus our efforts on our A SKUs and our B SKUs. And with the surge in demand in a number of our categories, it afforded us the opportunity to really get rid of a lot of our excess and obsolete inventory. So we've cut our excess and obsolete inventory over the last 2 years by more than 50%, so we now -- the quality of our inventory is much higher in terms of what we have on our balance sheet. We have less space needed in our distribution centers; in fact, we're already starting to close some of our distribution centers that are excess, because we don't -- we just don't need the storage space anymore. And we're starting to see customer service improvement as we get more focused on the SKUs that matter.

Got it. And then last, kind of on the big picture, and then I want to go into some of the units, but how do you come up with a long-term growth algorithm for this portfolio? And when I say that, it's -- I used to hear, covering Jarden, of "That's a collection of stuff that's in my grandma's closet that nobody buys," or "You're here for writing instruments, like who buys a pen anymore? Why do I need that?" So why should this portfolio grow at all? I mean, why shouldn't it just be a flat to declining business that generates good cash? That's the question I get more often than any.

Yes. So one of the things we did, and it's a little bit -- we tried to do this early on when we were starting the turnaround plan, was we looked at, pre-COVID, sort of what is the category growth rate if you look at the businesses that we compete in. And I think many of the businesses that you might say were in your grandmother's closet we've divested. So I think we're a different Newell today than we were and a different Jarden today than we were maybe 4 years ago because of the portfolio changes that we've made. That being said, with the portfolio that we have, we believe that in a pre-COVID environment, our categories are growing about 1% a year. And that's been true pretty consistently over a 3-year, a 5-year or a 10-year type time horizon looking backwards. We tend to have the #1 or #2 brand position in each of the categories in which we compete in. I think 80-plus percent of our business, we are either the market leader or the #2 player. And we believe that we have opportunity to gain market share because we tend to be the scale player, which, over time, with the complexity reduction that we're going after, we're going to have a cost advantage and a service advantage versus many of our subscale competitors. And as we're ramping up our innovation, we believe that we can grow 1 point or 2 faster than how the market is growing. So our long-term algorithm is that we've set in our evergreen model is to grow low single digits. If our categories are growing 1%, we aspire to grow kind of 2% to 3%, toward the top-end of that range, with market share gain driving us to go a little faster than the balance of the category.

And then I guess, just a follow-up to that, I mean same question is, how do you come up with the target margin for a business which -- these businesses can range from 20% margin to 8%, 9% historical margins. And there used to be a thought, there's tons of opportunity of shared services and back office and stuff like that, but as you go decentralized, centralized, stuff like that, it's -- I don't know how you -- well, how do you get to that -- here's the target margin?

Yes. So we've done a -- yes, we've done a fair amount of work on benchmarking on that question. And that benchmarking, I shared at CAGNY 2 years ago, that was one of the things that I did first when I came into the company. And really, what I was focused on was overhead cost and gross margin as well as advertising as sort of the 3 buckets. On overhead cost in 2018, the company's overhead was 21% of revenue. And that was very high. So if you looked at any benchmark, it was high. And I think the reason for that was that when Newell bought Jarden, they tried to basically centralize a lot of the front office. So they tried to centralize the innovation and the selling functions. We've decided that that was not the right approach. And so we've gone the other way and said, no, we want dedicated people that are focused on the consumer journey, on developing product innovation, on marketing, that are managing the P&L, that are dedicated by business unit, and where we want to centralize is the back office. So -- and we think -- and back office broadly defined, so that's things like accounting, things like payroll, things like the traditional stuff, but also things like supply chain, the IT systems in the company. And through that work that we've done over the last 2 years, we've taken our overhead rate from 21% down to 18%. So we've already taken 300 basis points out in 2 years. We believe that we can get that number down to 16% to 17%. So we think we've got 100 to 200 basis points of opportunity ahead of us. And this is largely by taking out kind of complexity and non-value-added cost that's internal to Newell that we don't think is going to disrupt how we show up and operate in the market. Similarly, on gross margin, we did a benchmarking that would suggest that we should be at 37% to 38% over time. When we started this, I think we were at 34%, 35%. We've actually gone a little backwards last year because of COVID costs and because of shutdown in our facilities. So we ended last year at 33%, but we think we've got 400 to 500 basis points of opportunity ahead of us. And that's through things like the SKU count reduction program. We're putting a big push on our fuel productivity savings initiative, which we've ramped up, and is now driving very strong productivity results. We're kicking off a major effort on automation across our facilities, which we got started on last year, but you're going to see us do a lot more going forward. And through that effort, we believe we can drive margin -- gross margin improvement. We don't think each of our categories or each of our business units will have the same margin dynamics. And so, it is -- we're treating each of them individually based on the competitive set. But as a total company, we think we've got significant opportunity for margin improvement, led by gross margin and overhead cost. And I think you'll see us invest a little bit of money back in higher advertising spend, which is embedded in our plan for this year as our innovation pipeline ramps up, to get the word out to consumers in a more meaningful way.

Got it. And turning a little bit to some of the categories, and I apologize for not talking about specific business units on the income statement, but I think I've gone through 10 reclassifications of the business units over the past 7 years. So I'm just going to talk about categories, which I can remember where they are. Writing. Prior to the pandemic, what -- that had business that stumbled. It probably was the first one to kind of stumble, ironically, out of the Jarden-Newell merger in terms of I think most investors, at least, thought that was the most stable business, but then that had the biggest kind of hiccups prior to everything else kind of starting to stumble. Do you feel like, pre-pandemic, that was back into a good place in terms of market share category, where you need it to be?

I do. I think the Writing business pre-pandemic was, we were on a roll. And you can see that if you look at the market share results, so one of our strongest franchises is the Sharpie permanent marker franchise, where we have very high market shares in the permanent marker category. And we've extended that last year into the pen segment, launching the Sharpie S-Gel pens, which has been a fantastic initiative. We've gained 3 full share points in the pens category at large in the U.S. and gained share...

I think it was gifted to me now at some point in the past year or I bought it myself.

Yes, exactly. So the Writing business in 2020 was down as schools were closed and as offices were closed as a result of the pandemic. But we were in a very strong position from a market share standpoint, from a -- it's one of our highest margin businesses. And the thing that I'm excited about is that -- a couple of things. So first of all, we saw consumption turn positive in the back half of last year. And so, we're now seeing consumption pick back up again. Our shipments were still negative in the back half of last year, because we wanted to end the year in a good retailer inventory position, and we did that. So we ended 2020 with retailer inventories in probably the best place they've been in many years. And so as we fast-forward into 2021, we think the Writing business is poised for a pretty significant bounce back. We're expecting the Writing business to grow faster than the balance of the company this year. We're expecting the Writing business to grow starting in the first quarter from a net sales and -- -- or core sales standpoint. And we've got embedded in our plan, both we and retailers are expecting the K-12 students to go back-to-school in September. So we're gearing up for a more normal back-to-school season, which will be a big boost for us. I will say, we are not planning for the business to be fully back this year to 2019 levels because of the remote work environment that we expect still in the office environment. But if you think about a big leg up this year from the school business and then if you fast-forward to 2022, we should get a big leg up again from the return to office that we expect once the pandemic begins to recede.

And just on that, can the company handle if -- and this is some wishful thinking, but we hit herd immunity in the spring, and offices all go back in the -- or open back up in a big way over the summer and schools come, and you could have a 1-year and 2-year or 18-month pent-up demand that really surges. I mean, can the company handle that type of spike?

Yes. We think we can. And the Writing business is an interesting one because most our business in Writing is self-manufactured. And we manufacture in Tennessee and have -- and we've been automating that facility. So one of the things we've been investing in as part of our fuel program, for example, is creating higher-speed lines and investing in higher-capacity lines. So on the Sharpie business, for example, we had a line when I started that made Sharpie markers -- we actually had about 8 or 10 lines in our plant in Tennessee that made Sharpie black permanent markers, and that line was running at like 100 units a minute. We've now put in lines that run at 500 units a minute, which are much faster, much more automated. And so we believe we've got the capacity to be able to handle sort of a surge in volume. And the good news is we're not -- in that business, we're not subject to port issues or container issues or any of those types of things, to a large degree.

Got it. Now I want to turn to kind of both kitchen electrics and outdoor, because they -- those were the 2 businesses that, pre-pandemic, were kind of the laggards in the turnaround. Those were the 2 businesses that probably got the biggest help from the pandemic in terms of consumer demand. So -- and they both had similar issues in terms of lack of innovation. I'd say appliance was, from everything from Keurig to Ninja to -- they were getting hit by the upstarts. And on Coleman, it seemed to be private label who was taking more and more share because there wasn't much innovation. So the broad, broad statement, but where do you view both of those businesses? I mean, you got one versus the -- and then the other. But in terms of has the pandemic covered all ills, and were -- and got them back to the front of the pack, is there still a lot of work to be done post-pandemic? Just the state of [ both ] businesses would be interesting.