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

Good morning. To start today, we're going to have Newell Brands. Now against the current inflationary backdrop, Newell would historically have been among the most challenged in our coverage. And instead, the company currently stands out as one of the few to have held earnings guidance for the year. Further, its portfolio has been well suited to new consumer behaviors in and around the home. We're lucky enough to have CEO, Ravi Saligram; and CFO, Chris Peterson, with us at the conference. Thank you both so much for joining us, and I'm going to pass it over to you.

Thank you so much, Lauren, for the kind introduction. Good morning, ladies and gentlemen. Let me start with some notes on forward-looking statements. Please note that today's presentation includes forward-looking statements and non-GAAP measures. Actual results may vary materially from forward-looking statements due to the risks and uncertainties listed in our SEC filings. Available explanations and reconciliations of non-GAAP measures can be found in the appendix to today's presentation. So let me get started with some good news. Our Writing business is off to a tremendous start. With back-to-school, 90% of schools are now open. Next, in week of September 30, New York opens up, and we're having the whole categories up double digits. We're up significantly higher than the category. Our shares are very strong. We've gained significant share overall and, of course, in pens. And on top of that now our consumption actually for Newell is tracking slightly higher than even 2019. So how's that for a good morning wake-up call on BTS? So with that, today, we want to talk more about the future. Our turnaround clearly has yielded strong results and -- but today, we're evolving now, we can see getting to a place of sustainable and profitable growth. And some big news is about international. We think we're ready to tackle and leverage this great opportunity. And as we continue to reduce the complexity, our teams are going to go to the next level of building operational excellence. So Newell, at a glance, very quickly. We're a $10 billion company. Most important, we're a house of just incredible brands, and I think we're all familiar, whether it's Rubbermaid or Coleman or Graco, Oster, Yankee Candle. We've made terrific progress on our turnaround. After several years of top line declines, the second half of last year capitalizing on COVID trends, we actually registered 6% core sales growth. And this year, in the first half, our core sales growth has gone up 23%. On the back of that, our operating profit and EPS has gone up even higher. And for the full year, we've guided 7% to 10% core sales growth. And then longer term, we feel we can get to low single digits consistent growth. Our operating margins have been improving. And this year, despite $560 million of inflationary pressure, we are holding our operating margin flat versus last year. And tremendous improvement on cash conversion cycle, all the way from $115 million down to $72 million and going down more. So if you look at the future -- as we look at the future, we initiated our turnaround in 2019. In '20 and '21, we're gaining stability, the culture has really improved, morale is up, our people want to win, we're executing on the turnaround. And now we're saying, "Hey, it's all about driving sustainable, profitable growth as we look at the future." We're positioned well to win as one Newell. We have clearly articulated a vision, purpose, goals and values as well as with all our stakeholders how we want to come across. Vision is really to go back to our roots to being a consumer-led innovation powerhouse and drive beloved brands by brightening their lives, creating moments of joy and confidence; and for shareholders, delivering top-quartile returns by driving sustainable top line growth, margin improvement and strong free cash flow. So what are going to be our key strategies as we look at the future? It is all about building brand strength and improving gross margins. We have terrific brands, and what we need to do is how do we improve their worth and value by focusing very strongly on gross margins, becoming a consumer-led, innovation-driven growth engine that's a strategic partner to our customers, and then leveraging our e-commerce strength of 21% e-commerce penetration, how do we become world-class in omnichannel? And the new news today is our focus on international. 35% of Newell's business is outside the United States, a whopping over $3 billion. So we have a lot of scale already. How do we leverage that and accelerate growth and profitability and continue to reduce complexity while driving free cash flow? And now another piece of new news is how do we go from fixing some of our operations to really becoming operationally excellent. And Chris is going to talk to you about 2 major initiatives. One is a project called Ovid, which is all about transformation of our supply chain; and second about automation. All of this on a bedrock of a people-first agenda fostering employee pride and creating a winning culture. So as we look at our portfolio, we have a very resilient portfolio as we showed in the pandemic. Last year, even when Writing was down, our highest gross margin business, we were still able to drive top line in the second half, as I mentioned. So with our 8 businesses, we have created very clear roles for each business unit. We'll classify them into 3 buckets. The first, what we call strong growth and value accelerators. These are businesses with strong growth potential and high gross margins, margins upwards of 40%. And so businesses like Writing and Food and Home Fragrance classify and these are about 38% of our sales. The second is solid value generators. These are steady businesses with decent growth potential and good gross margins, Commercial, Baby and Connected Home are in this, and they're about 1/3 of the business. And then we have 2 businesses which are in the midst of turnarounds, one farther along, Home Appliances really doing well and has leveraged the pandemic. That's 30%. Home Appliances and Outdoor share our big issues gross margins. How do we really continuously improve our gross margins? We have now written long-term 5-year plans for each one of these businesses according to their roles, and we will disproportionately put resources, resource allocation and capital against the businesses that have the highest chance of growth and value acceleration. So let us now move from -- to talking about our global footprint. Outside the U.S., we're about $3 billion in sales with the greatest strength in Europe. And our state of our international business, we have large presence in many of our businesses. We compete in many categories. But we -- even though we're in several countries, we have limited connections because when we went outwards, they were opportunistic business by business as opposed to a Newell-wide approach. We've not had a standard go-to-market strategy, and it's been BU focused as opposed to country focused are opportunities to marry the 2 together. But the one great strength we've had is we've utilized centralized e-commerce. And in fact, international e-commerce has grown a lot faster than the U.S., and we think that will be a tremendous opportunity. Overall, reducing fragmentation is our major opportunity. Let's take a quick look at our business internationally. Our top 10 countries are 75% of our sales, and our top 10 vary anywhere from $100 million to $500 million. And the hope is some of our bigger countries, we can actually someday make them into $1 billion countries. We have many of our categories represented, but when you look at this, you can see that we don't have as much of presence with our Home Fragrance business or our Food business, Food Storage, internationally. They're kind of in the 20s whereas our Appliance and Outdoor businesses are much higher in the 40% range internationally on their footprint. So we think there's a tremendous opportunity to really grow our high-growth, high-margin businesses internationally. Let me illustrate. Take a look at the Writing business. The writing market -- the global rising market, 70% is international, 30% in the U.S. Whereas our business, 65% is in the U.S., 35% international. So you can see there's a tremendous opportunity for our high-growth, high-gross margin business for Writing. In terms of margin improvement, in the U.S., our overheads as a percent of net sales is in the mid-teens. But internationally, it's greater than 20% because of the fragmentation. So you can see there is an opportunity to not only accelerate sales growth but also improve margins internationally. So we have 5 big key strategies. We're going to focus, and we're in about 60 countries with direct footprint, but we're focusing on the top 10 to 15, where we have critical mass and really drive them. Capitalize on e-commerce is an emerging channel and to drive global growth. And then a lot of the smaller countries where we may have a lot of overheads but not enough critical mass, we're looking, "Hey, can we convert some of those to distribute our go-to-market models?" And then improve gross margins through productivity efforts. We have a lot of businesses that have individual customer service centers and warehouses. So how do we create an efficient regional supply chain by each of our geographies? And then develop one Newell country-led organizational models in key countries with country presidents, et cetera, to reduce overheads and unlock profitability and drive innovation, which is localized. The good news is we have -- with $3 billion, we have strong international talent and great international leaders, we just need to create a one Newell view. So with that, let me conclude before I turn it over to Chris. Newell has tremendous shareholder value-creation opportunity as we look forward. We have now clarified a clear model on what we want the organization focused on. It's all about core sales growth, driving gross margin expansion, reducing overheads, improving our operating margin and then making sure that our free cash flow realization is high, about 100%, reduce that cash conversion cycle, reinvest in the business. And as we think about all of that and we generate more and more cash, as we look at capital allocation, we have tremendous opportunity, and we may explore, over time, tuck-ins and tuck-outs as we try to maximize our portfolio to drive shareholder value. So with that, Chris is going to tell you about more stuff that we're doing and details. Over to you, Chris.

Thanks, Ravi, and good morning, everybody. I wanted to start with the complexity reduction story. When we started the turnaround plan in 2019, one of the areas that we got focused on was complexity reduction, and we've made significant progress as many of you know. Over the last couple of years, we've done 13 ERP system migrations. We now have over 90% of our revenue on 2 ERP platforms. We've taken out 15% of our office locations. We've reduced our IT business applications by 90%. We've taken out 15% of our legal entities. And we've reduced over 80% of our indirect suppliers, to name a few. The one that I'm the most excited about is the one on the right here, which is the SKU reduction chart. When we started the journey, we had over 100,000 SKUs that we were selling around the world. We ended last year with a SKU count that was cut more than half to 47,000, and we set a new target of 30,000 by the end of next year, which we're very much on track to deliver. Given the progress we've made on complexity reduction, we are now changing our focus a bit, although there's more to do on complexity reduction, to evolve into operational excellence is our strategy. And there's really 4 key pillars to this. Today, we are announcing Project Ovid, which I'll spend a little bit of time talking about, which is fundamentally about transforming the way we go to market, primarily in the U.S. business, which we think has big implications for us from a competitive and cost standpoint. The second one is driving enterprise procurement to optimize our scale and create strategic supplier partnerships, where we continue to believe we've got opportunity to drive both scale and cost benefits. We also are focused on reimagining our operations, and we're starting to adopt what some call Industry 4.0, which is about automating and digitizing our manufacturing and supply chain. And then finally, becoming the reliable retailer partner of choice in terms of how we interact with our retail partners, all of this based on a foundation of the right people, process and technology. So let me spend a minute on gross margin. When we started the turnaround effort, I had showed a chart that said we were a 35% gross margin in 2018. And the benchmarking would suggest that we should be at 37% or 38%. I think I showed this at CAGNY a couple of years ago, and we still believe that the 37% to 38% is the right target. We've taken a little bit of a step backwards in '19 and '20 as a result of COVID cost and the inflation trend. But we are very excited about the opportunity to begin to make progress starting next year toward that 37% to 38% target. And we have a variety of activities that we're focused on, including launching margin-accretive innovation, driving FUEL productivity savings, the SKU complexity reduction, which should be a major contributor, pricing and mix management, plant and distribution center network optimization and automation. If you look at on the right side, our FUEL productivity program that we started a couple of years ago, when we started the program, the company was generating less than 1% of FUEL productivity savings as a percent of our cost of goods sold per year. We ratcheted the program up in 2019 to about 3%. Last year, we delivered 4%. This year, we're on track for 3.5% to 4%. We believe we've got a sustainable path to deliver 3% to 4% per year going forward. I just want to spend a second on automation, which is becoming a significant opportunity for us. So these are 3 examples of automation projects that we implemented last year. There's an e-commerce robotics on the left that we implemented in our Yankee Candle e-commerce distribution center. We deployed 80 robots in that center. It improved our pick rate by 300%. The one in the middle is an auto store technology that allows to, in an automated way, store products and retrieve products. And the one on the right is a manufacturing robot that we actually implemented in Mexico that is replacing labor in that facility. We have today about 20,000 people across the company's manufacturing and distribution centers. We believe over the next several years, we have the opportunity to automate and eliminate about half of that labor force, which is a significant cost opportunity for us. And this is what gives us confidence that we can sustain the FUEL productivity savings target that I showed previously. Let me shift to Project Ovid. So this is a project that we are unveiling today for the first time, which, as I mentioned, is fundamentally about changing the way we go to market, primarily in the U.S. The key tenets of the program is to move from business-specific supply chains and go-to-market approach as one Newell distribution company with pan Newell mixing centers with customer-centric operations. In order to do this, we expect to harmonize customer payment terms. So today, for example, we're administering over 2,000 payment terms in the U.S. We expect that to go to one harmonized set of payment terms per retailer, which is a dramatic efficiency savings for both us and the retailer in terms of how we interact. We expect to have trade efficiency, legal entity rationalization as part of this project. This project we've been working on from an architecture standpoint for the last 9 months. We expect the execution part of this project to start later this year, and we expect to make significant progress and be operating in the new model in a waved manner over the next 18 months. This project has a very strong financial return profile for the company. Effectively, the way to think about it is, today, we operate 23 unique supply chains in the U.S. market. And when I say unique supply chains, think about it as one of our brands will have a single distribution center, and we accept orders in a single legal entity or only that -- from that retailer. So the retailer actually has to place 23 different orders to us through different legal entities that all gets shipped on less than truckload shipments, et cetera. What we're moving to is a Newell distribution company that creates a single integrated supply chain with pan Newell mixing centers that's going to allow us to accept a single invoice, deliver on a full truck and invoice on a single invoice. We think there are significant benefits to this across the go-to-market approach for both us, the retailer and consumers. As an example, from a sustainability perspective, our current estimates are that we're going to be able to take about 1/3 of the miles driven in the U.S. market out of our supply chain for this change. For Newell, what this means is we'll have a single Newell service. We're expecting to have 7 mixing centers across the U.S. Many of these are existing facilities that will be repurposed. But there are a couple of new distribution centers that we're standing up. We'll have customer-centric operations, and we are working on pricing and trade redesign and harmonization as part of this. From a retailer standpoint, this will dramatically improve the retail experience with Newell. We've already had discussions with the top 20 retailers that we do business with in the U.S. They are very excited about this program. We expect this to improve service levels, reduce inventory and significantly reduce the administrative complexity that we interact with our retailers. From a consumer standpoint, Ovid is going to enable us to have stronger omnichannel capabilities, stronger brand presence and more consistent product access for consumers. Moving to an integrated operating model is also going to allow us to drive further overhead efficiency. When we started the turnaround journey, in 2018, we started from an overhead as a percent of sales of 21%. We've made significant progress over the last several years, taking it down to 17.5% in the first half of this year. And we're getting pretty close to the 16% to 17% benchmark level that we had set a couple of years ago. The actions on the right should allow us to continue to drive overhead reduction and get to that benchmark range in the near future. As Ravi mentioned earlier, we've made dramatic progress at transforming the company's working capital and driving cash conversion cycle. When we started the turnaround journey, we were at 115 days of cash conversion cycle. We've reduced that to 72 days at the end of last year. This year, through the first half of the year, we're running 14 days better than a year ago. And we're very much on track to get to our long-term target of 50 days over the next couple of years. If we move to the leverage target from the cash that we're generating, we are resetting a more aggressive target today than when we first started the turnaround journey. When we started the turnaround journey in 2017 and '18, I think the company was operating with a net debt-to-EBITDA leverage ratio of close to 5x. We've made significant progress. We ended the second quarter of this year down at 3.1, which is pretty close to our previous long-term target of 3.0. We've decided to reset that target today to 2.5x and our plan to get there is effectively to use cash from operations to repay what we currently have open as short-term debt and then drive the balance of the improvement through EBITDA growth to get to that 2.5x target. That brings us to our evergreen targets, which we are reiterating. Over the long term, we believe that we have a line of sight to deliver core sales growth in the low single digits, 50 basis points on average of annual operating margin improvement, free cash flow productivity of greater than 100% and now a net debt-to-EBITDA leverage ratio of 2.5x. So let me end where Ravi started, which is I think the key messages as we look at the business today is the turnaround has yielded very strong results. We are evolving the company to sustainable and profitable growth. We believe we've got an opportunity to really drive the international business and capitalize on the opportunity there. We continue to reduce complexity and see strong benefits from that. And we are now pivoting to build operational excellence. So with that, I will open it and turn it back to Lauren for questions.

Great. That was a lot. That was a lot. So you sort of upset what I was going to -- the questions I was going to ask. But I'm going to start first, I apologize, with short term. I feel like we have to ask about inflation. Just given the Hurricane Ida, any thoughts on inflationary pressures and how that may have shifted from the thoughts you had in June?

Yes. So inflation certainly has been a significant headwind this year. When we reported our second quarter at the end of July, we updated our inflation guidance to $560 million of headwind this year, which was a increase from $360 million that we thought at the end of the first quarter. Since the end of July, certainly inflation trends have not gotten better, but they have also not gotten -- changed materially. So at this point, we don't see a significant material change to the inflation guidance that we gave at the end of July. But certainly, it's something that we continue to monitor, manage. And to deal with inflation, we are doing a number of things, including driving productivity through our FUEL productivity savings, taking pricing and leveraging the strong revenue growth that we've got this year, which is what's allowed us to maintain our operating margin, as Ravi mentioned, versus last year.

Okay. Great. And then on Project Ovid, that's also a lot. So you didn't specify savings, and I just was curious how we should think about that. Is there a hard dollar number? Is it an enabler of the gross margin target and actually getting there? But a little more detail there might be great.

Yes. So we think there's significant savings on -- particularly in the gross margin area. The way we're thinking about it now is this gives us confidence in that 3% to 4% FUEL productivity ongoing savings program, and this will be a key driver of being able to generate that on a sustainable basis. It's going to be a -- as I mentioned, this is going to be a project that we do in phases over the next sort of 18 months. So we expect to get some of the savings in 2022 and really a significant chunk of the savings in 2023.

Okay. And with regard to that project, I mean, one thing that I was thinking about as you were speaking is that Newell being so fragmented in its approach to and relationship with retailers, yet historically, some of the idea in the company was, well, we bring big company fundamentals to these sort of fragmented categories. But as you were going through the fact that there were 23 different supply chains from a retailer standpoint, it sounds like you were effectively, in some cases, 23 different companies. So does this also have implications for the sales process, that relationship with retailer in terms of shelf sets, placements, things beyond the supply chain? Are there sort of revenue implications of when you get to completion on this project?

Yes. Let me take that. I think these are integrated, Lauren. And one of the reasons I brought our Chief Customer Officer on my case was so that we could speak with one voice to customers. And I think in the past, we were not the easiest company to work with because of all our fragmentation. We've actually worked lockstep on Ovid with our customers and their supply chain people. They're very excited about it. They are supporting us and helping us. We think that this is going to further enhance the one Newell approach. So everything you see, whether it was international or on Ovid, we're trying to create how you leverage our $10 billion versus being 8 companies that are all $1 billion each, we're now becoming one company that is in bringing to bear the power of $10 billion. And I think it's going to substantially improve our customer service levels. So -- and then you're seeing what Chris talked about Ovid, what I was trying about international, it's really Ovid international is the next phase that we're going to do.

Okay. And on international, I'm going to bring 2 things together here, which is obviously great news on back-to-school season and Writing that you kicked off with. So thanks for giving me an extra shot of caffeine this morning. But along with that, you mentioned Writing as an opportunity internationally. And if also, if I think back historically, that's long been an opportunity identified by prior management, but tough to kind of crack that opportunity. So what is it that you scoped out you think you can do differently with Writing to actually capture that opportunity and capture what feels like you believe a rightful market share?

Yes. Already, we have great strength, Lauren, in countries like the U.K. and in Australia where we have got strong shares and great franchises. I think we've got some of the big markets for Writing are really China and India. And in China, we've had a fine Writing business. So now we're really trying to see how can we build on the back of that. And the same with India, we're now -- we've put together -- we went through a distributor there, we're actually looking at a direct market. So these are big, big markets for us. And there's still many countries even in Europe where we can -- like Germany, where we think there's a great opportunity. So I think -- and there are a lot of new things we're coming up on Writing. For instance, we also -- this year, we have been seeing share gains on our Dymo labeling business in Europe for the first time. That has been great to say, and so -- and there are a lot of new things we're doing. So the Writing is not just pens, but our markers, we're looking at a lot of innovations, which we think could help us internationally.

Okay. That's great. I think we have to call it there. But you guys gave us a lot to work with today. So thank you so much. It was a great presentation and look forward to speaking again soon.

Thanks.

Thank you very much, Lauren.