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

Greetings. I'm Ravi Saligram, CEO of Newell Brands. Let me start with the obligatory surgeon general's warning. This presentation and materials and remarks today will contain forward-looking statements. The slide has all the details if you wish to read them. So now let me give you a sense of where the new Newell is heading. Our strategy is working. The turnaround has gained momentum but we are actually evolving to driving sustainable and profitable growth. We're continuing to reduce complexity. As we look forward, we want to capitalize on our international opportunity and build operational excellence. Newell at a glance. We're about $10 billion plus in size. We have strength in e-commerce with 22% e-commerce penetration, 25 brands that account for about 85% of our sales, 10 major countries. But importantly, all our top 10 brands are beloved by consumers, and we grew sales on all our top brands in 2021. We're delivering on our promises. Last 12 quarters, we have met expectations, and in 2021, we beat expectations. We had strong financial and operational results, and despite mammoth inflation, we took mitigating steps to offset it. In fact, we added $1 billion of sales despite supply chain disruptions. We returned to core sales growth. We reduced complexity, and it is not just P&L. We improved our balance sheet and reduced our leverage ratio. We are so proud that we returned to core sales growth in 2021 after years of decline. We will come back with a whopping 12.5%, adding $1 billion in revenue despite supply chain challenges. For next year, 2022, we have said we will be flat to 2%, and our evergreen model is about low single digits. On operating margin, we've been improving steadily. Our outlook in '22 is to improve operating margins 50 to 80 basis points. And long term, our evergreen model, we're still committed to 50 bps annual increase. And our cash conversion cycle, Chris and the team have really hit the ball out of the park. 115 days in '18 to 68, nearly cutting it in half, and long term, trying to get to 50 days. We're on our way, on our way to win as one new Newell. Our vision is clear. We want to be a consumer-led innovation powerhouse with planet-friendly beloved brands that create moments to joy and build confidence for consumers. And for shareholders, we're committed to delivering top-quartile returns by driving sustainable top line growth, margin improvement and strong free cash flow. For our employees, we're going to be a place to grow and thrive. And for society at large, we want to be a force for good. We have 6 key strategies: build on the strength of our iconic brands with a laser and obsessive focus on gross margins; become consumer-led, innovation-driven growth engine that is working closely with our customers; growing e-commerce and becoming world-class in omnichannel; accelerating international growth; reducing complexity while we drive free cash flow and driving operational excellence through automation and Ovid, but all of this embedded on a people-first agenda and building a culture of winning. So as we are going on this journey of sustainable growth, we looked at our portfolio and classified them in 3 buckets. The first bucket was about growth and value accelerators. These were our businesses that have strong growth potential, high gross margins: Writing, Food, Home Fragrance, accounting for over 40% of our sales. And in aggregate, they delivered almost 16% growth in '21. Our solid value generators are steady, solid businesses, decent growth, good gross margins. And continuous improvement, these teams in Home Appliances and Outdoor & Recreation are all about improving gross margins and operating margins. We need to improve the profit profile and we know we can do it. These 2 businesses have great international businesses. It's U.S. that there is softness on gross margins. We know we can change it because we have the brands. But they still grew 14%. This combined portfolio is what makes us strong, so strong that we think that it's an all-weather, all-season portfolio well suited for shifting consumer trends, whether it's a hybrid work model. People need Sharpies and Paper Mate and Dymo everywhere, whether it's at work or at home. And Home As the Hub with the brands like FoodSaver, Rubbermaid, Calphalon, with the interest in kitchen, in cooking, we think we can capitalize on that. Well-being is becoming very important, mental health. What better way to improve and uplift your mood than with Yankee Candle and the call of the outdoors with Coleman. Sustainability is something we are incorporating to all our brands, and we just launched Century, which is based on recycled materials in the baby business. And all of this, we are prepared for omnichannel. As the consumer is preparing these days to look online, buy at store or buy at -- pick up at curbside, it is all over. We are saying we want to provide amazing brand experiences and supply chain fulfillment to really drive omnichannel. The heart of our company is innovation. We're a company built by pioneers, and we are now reigniting that engine at Newell through clear brand purpose for each of our brands to inform our long-term innovation road map. It's consumer-focused innovation, leveraging consumer analytics, insights, foresights and trends and being nimble and agile with a backdrop of a financial lens. We want to launch gross-margin-accretive, needle-moving innovations that become future growth platforms and all of this with collaboration with our customers, with channel-appropriate innovations where we can win together. And the power of having 7 business units is the synergies on technologies and platforms. So Home Fragrance expertise on sensory can be applied in commercial, in sanitizers. All of these innovations is through great marketing, through activation by scaling innovations through 360-degree commercialization. Let me illustrate. Our latest innovation in 2022, Rubbermaid DuraLite Bakeware, taking the brand equity of Rubbermaid which consumers love into a new category for us and coming up with a product innovation that can go to 550 degrees and is aesthetically pleasing that you can go from -- right from the oven to the table. And we are doing this in a 360-degree way through social influencers, national TV and through omni experiences and celebrity partnerships. Another example is what we did last year with the launch of Mr. Coffee Iced, and this is a great example of platform thinking. We just didn't stop on our laurels and said, "Hey, it was the #1 in the small appliance section and many retailers." We said, "How do we build a platform?" So we've come up with Mr. Coffee Iced+ Hot. And we know that people want to be baristas at home so we've come up with the frappe -- Mr. Coffee Frappe. And all of this through creating buzz and awareness through 360-degree mega influencer partnerships, through social media, through great content so that we're converting people to purchase, whether it's online or in-store activations. Now let me show you 4 commercials for great brand innovations which have been scaled, starting with Sharpie. We will then show you Yankee Candle Signature Collection; our Rubbermaid Brilliance which has scaled about $100 million; and finally, the Coleman call of the outdoors through the 1900 collection. [Presentation]

The proof is in the pudding, and the pudding shows 6 consecutive quarters of core sales growth. But not just sales, the consumer has voted yes. POS up '21 versus '20, but also on a stacked basis POS, our consumption is improving. It shows the formula is working. Innovation is back at Newell, folks. It's not just domestic. We have a great opportunity outside of the United States. Our top 10 countries accounted for 3/4 of our international sales. We have great strength in Europe with about $1.6 billion in EMEA. Latin America, a fantastic infrastructure of the appliance business. We're going to take this and leverage and power international. How are we going to do it? Well, our starting issue is we've got great presence but a lot of fragmentation. We have not had a standard go-to-market strategy across these countries. So the key to unlock it is we're going to focus on depth versus breadth, drive growth in the top 10 countries where we have strength and then improve gross margins through productivity, integrating back office systems, creating efficient regional supply chains. And then a lot of small countries we may change from a direct model to a distributor model and exit some smaller countries, which will also make our overheads more efficient. We're going to capitalize on e-commerce, which we've done already, but we've been driving double-digit growth. We'll turbocharge this and make it a mainstay. And importantly, we're going to leverage existing infrastructure. In Latin America, where we have great strength in appliances, we're going to apply that infrastructure and without adding a lot of overhead, say, "Hey, how can Food and Writing and other businesses go on the back of appliances so that we become One Newell?" And all of this -- we have now brought in an amazing leader, Maria Fernanda, who will lead our international efforts and turbocharging. So as we go into 2022, we have 5 key priorities. '22 is all about margins, improving gross margins. We are laser-focused. And despite inflationary pressures and supply chain challenges, we are going to improve customer service levels. We're going to take pricing. We're going to improve margins. We'll continue to drive the core sales growth in innovations with the focus on mastering the 360-degree consumer journey and delight consumers at each touch point. We'll turbocharge international, as we mentioned before. We'll continue to invest in transforming our supply chain. And you will hear from Chris as he talks about Project Ovid and automation. And we'll continue to strengthen the One Newell culture and build on our employee engagement momentum. Folks, from a low point in 2019, we have dramatically improved our employee engagement, and today, our employees are our secret sauce and a competitive advantage. We're enhancing our reputation. We're embracing our responsibility to be a force for good in the world. We partnered with UNICEF to donate Sharpies. The Coleman manufacturing facility became the first one to use utility-scale renewable energy. We've done a lot of good in each of our businesses, and the world has recognized our people's efforts, whether it's Fortune to become World's Most Admired or Wall Street Journal's 250 best managed. And you can see all the other accolades. I am so proud of our 32,000 employees. They're being a force for good but also driving Newell to drive great shareholder and stakeholder returns. With that, I am absolutely convinced that the best days of Newell are ahead of us. And to talk about some great operational innovations and the continued journey on reducing complexity, here is Chris Peterson, my friend and partner.

Thanks, Ravi. Good afternoon, everyone. It is a pleasure to be here again, although we are certainly missing Florida, especially in February. It has been over 3 years since we initiated the turnaround at Newell Brands, and we've seen tremendous progress as we have built out our team, implemented the strategy and strengthened employee engagement. As we enter 2022, we are laser-focused on driving sustainable and profitable growth in a challenging external environment while building competitive advantage and operational excellence. Complexity reduction across every aspect of the organization was one of the first areas we focused on as part of the turnaround. Over the past several years, we have completed 13 ERP migrations, including 4 last year. Once the Connected Home & Security divestiture is complete, we will have 95% of the company's sales on 2 ERP platforms. We have meaningfully streamlined our supplier network, reducing it by about 80% since 2019. We have significantly simplified our IT infrastructure, taking out roughly 90% of the apps and we have reduced our real estate footprint and the number of legal entities by roughly 15%. SKU simplification is another area where we have driven significant progress. Back in 2018, we had more than 100,000 SKUs, and we ended 2021 with about 36,000. This represents a 65% reduction in just 3 years as we have moved a lot quicker than initially contemplated. At the same time, average revenue per SKU has tripled since 2018. Exactly a year ago, we set a target of about 30,000 SKUs by the end of 2022, and with better-than-expected progress on that front in '21, we are very much on track to achieve it. While there is certainly more to do on the complexity reduction front and we will continue on that path, we are now in a position to evolve to operational excellence, which includes 4 key pillars. Project Ovid, which we announced in September of last year is the first one. It is a transformative supply chain initiative for the company that will enable us to build a scaled One Newell customer-centric supply chain. The second pillar is driving enterprise procurement to optimize the company's scale and create strategic supplier partnerships. The third pillar is reimagining the company's operations and moving toward Industry 4.0 as we automate and digitize our plants and distribution centers. The fourth pillar is all about becoming the reliable retailer partner of choice as we strive to further improve customer service levels and the overall customer experience. These 4 pillars are underpinned by our people, processes and technology and are foundational elements of our gross margin improvement plans. The opportunity for gross margin improvement is significant. Over the past 3 years, Newell's gross margin has come down mostly due to COVID-related costs as well as unprecedented levels of inflationary pressure more recently. These headwinds were only partially offset by the fuel productivity program, complexity reduction activity and pricing actions which lag inflation. We continue to believe that 37% to 38% is an appropriate gross margin benchmark for the business, and it represents a sizable 600 to 700 basis point opportunity from 2021 levels. We are implementing a number of actions to get there. They include launching margin-accretive innovation, continuing to drive productivity and SKU reduction, raising prices to cover inflation, actively managing the company's category mix with low-margin exits planned for 2022 across the Outdoor & Recreation and Home Appliance businesses, optimizing the manufacturing plant and distribution center network and continuing to bring automation to Newell's facilities. Last year, inflation accounted for about 9% of Newell's cost of goods sold. Even though prices for some commodities have eased, 2022 is shaping up to be another highly inflationary year for the company. And we currently expect it to represent about 8% of cost of goods sold with sourced finished goods, ocean freight and wages being the major drivers. Like last year, we are taking several mitigating actions, including implementing price increases, leaning into fuel productivity initiatives, maintaining tight cost controls and continuing to optimize Newell's promotional spend. Every single business unit is taking pricing this year and is expected to benefit from carryover impacts from 2021. We have driven a strong productivity culture at Newell Brands. And over each of the past 2 years, we reduced the company's cost of goods sold base by about 4% through a variety of initiatives that focus on manufacturing efficiencies, enhanced planning actions, procurement savings, product value engineering and distribution and transportation savings. For 2022, we expect to fully offset inflation through productivity savings and pricing actions as we focus on rebuilding Newell's gross margin. Supply chain automation is another key initiative to drive gross margin improvement. We started the automation journey 2 years ago and have implemented 2 large-scale piece-picking systems and installed 375 robots across Newell's facilities to date. This year, we expect to deploy more than 300 additional robots as we continue to see returns in the high double-digit rate with paybacks within 1 to 2 years. Automation remains a meaningful opportunity for the company. At the end of 2021, we had about 17,000 people employed in manufacturing and supply chain roles, and through automation, we think that number may be reduced significantly over time. Let me now provide more detail on Project Ovid. This is a multiyear supply chain initiative through which we will transform Newell's go-to-market capabilities in the U.S. by consolidating 23 unique business-specific supply chains into a single integrated supply chain. We will move to One Newell distribution company, which will allow us to operate as One Newell provider for customers in the U.S. We will establish pan-Newell mixing centers in the U.S. so that products from across various business units will be combined and shipped together in full truckloads to more quickly and efficiently satisfy customer demand, relieve congestion on the docks and enable omnichannel success. We will harmonize customer payment terms, which should drive significant efficiencies, and we will further simplify the organization by rationalizing our legal entity structure. This project has a very strong financial return profile, unlocking savings from fuller trucks, closer proximity to retailers and DC optimization. Looking at the time line, in 2021, we completed the detailed concept, design and build phases of Project Ovid. Early this year, we moved to the testing, refining and implementation phase and recently concluded the first round of systems integration testing. We are laser-focused on ensuring this project is executed with excellence and are working together with our retail partners to ensure a successful outcome. As we indicated previously, we expect Project Ovid to be implemented in waves over the next 12 months. Our new distribution center in Newville, Pennsylvania will start receiving initial shipments in March, a very exciting moment for the company as this opens up the East Coast ports for us. We also plan to stand up Newell Brands distribution company in the summer, which will enable us to achieve an operational cadence defined by one order, one truck and one invoice. By better leveraging scale across the organization, we expect Project Ovid to create significant value for Newell our customers and our consumers. From the company's perspective, we will have a One Newell service network with 7 mixing centers across the U.S. 5 of them are existing distribution centers that are being repurposed, and we are standing up 2 new ones, including the facility in Newville, Pennsylvania. Newell Brands will have customer-centric operations, and as part of the harmonization process, we are currently redesigning pricing and trade terms. From our customers' perspective, this should significantly enhance the retail experience with Newell, lead to better service levels and reduced inventory and administration complexity. When it comes to our consumers, Project Ovid should enable more consistent pricing, better access to products, stronger omnichannel capabilities and improved brand presence. Through Project Ovid, we expect to advance Newell's go-to-market capability as a competitive advantage to direct peers and enhance the company's supply chain resiliency and agility. Since 2018, we have made significant headway on overheads. In fact, at the end of last year, Newell's overhead-to-sales ratio was 16.5%, which represents a 150 basis point improvement from 2020 and a 450 basis point reduction from 2018. Rigorous focus on complexity reduction, tight cost controls and closure of underperforming Yankee Candle retail stores have been integral drivers of the improvement in the company's overhead-to-sales ratio over the past several years. Although we have reached the benchmark of 16% to 17%, as we move into an integrated operating model, we see opportunity to drive additional efficiencies through further simplification actions as well as by reducing international fragmentation and implementing global business services. Over the past 3 years, we have placed tremendous emphasis on driving strong operating cash flow and accelerating the company's cash conversion cycle. Back in 2018, Newell's cash conversion cycle stood at around 115 days, among the worst in the industry. Since then, we have reduced the cash conversion cycle by about 47 days, ending 2021 at 68 days. Significant SKU count reduction in combination with extension of payable terms and enhancements in the receivable collection process have fueled strong progress on the cash conversion cycle. In 2021, we strategically built inventory on top-selling SKUs, putting the company in a stronger position to service our retail partners and meet consumer demand going forward. We expect to make further progress on the cash conversion cycle in 2022, particularly as it relates to drawing down inventory and continue to see additional opportunity ahead through more efficient working capital management and better forecast accuracy. We are very much on track to get to the long-term target of 50 days. Strong cash generation over the past several years has enabled us to significantly strengthen the balance sheet as we deployed excess cash toward debt reduction. Newell exited 2021 with a leverage ratio of 3.0x, a meaningful improvement from 4.0x in 2019 and 3.5x in 2020, driven by a combination of debt reduction and EBITDA growth. We have been unwavering in our resolve to deleverage, and we're very pleased that one of the rating agencies upgraded Newell's debt to investment grade a few weeks ago, which reopens access to the commercial paper market and will reduce the company's interest expense. In September, we reset the long-term leverage target to 2.5x and expect to get there over time through EBITDA growth. As we look forward, we will continue to focus our actions on driving strong operating cash flow. In terms of our capital allocation priorities, first and foremost, we will invest in CapEx projects with a targeted rate of return in the strong double-digit range. Second, we expect to pay a dividend in line with the current level. Beyond that, for excess cash flow, we will consider share repurchase or tuck-in acquisitions where we've set a high bar. Note we recently announced the divestiture of the Connected Home & Security business to Resideo Technologies for gross proceeds of $593 million. We expect to complete this transaction by the end of the first quarter and anticipate allocating the after-tax proceeds toward both debt paydown and share buyback with the goal of maintaining Newell's existing leverage ratio. We are committed to achieving the company's long-term evergreen targets. Depending on the macro environment as well as Newell's opportunities for investment, performance may be above or below these targets in any specific year. Our evergreen targets include delivering core sales growth in the low single-digit range, annual operating margin expansion of 50 basis points, free cash flow productivity around 100% and reducing the leverage ratio to 2.5x. For 2022, our outlook is a bit more muted on core sales growth given the challenging comparison but above the algorithm on operating margin as we implement actions to strengthen Newell's gross margin and maintain tight cost controls. Let me end on the same note where Ravi started, with our key messages for today. First, we firmly believe the strategy we have implemented is working. Second, as we move forward, we are laser-focused on driving sustainable and profitable growth. Third, we are capitalizing on the international opportunity where we see potential on both top line and margins. Fourth, while we have come a long way on complexity reduction over the past 3 years, this remains an area of focus for the company going forward. And fifth, we are pivoting towards building operational excellence throughout the organization and are excited about what lies ahead.