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

Yes. So I would say a couple of things maybe as perspective. And I'll start with what you said, which is that we have not guided for Q4. We've only guided for Q3 and for the full year. And actually, when we guided at the end of Q2, we raised our guidance for the full year to now flat to plus 1%. So at the midpoint, we're forecasting the year to be up on core sales this year. From a category growth standpoint, our guidance assumes a negative 1 category growth number. We saw a negative 1 in the first quarter. In the second quarter, we were actually flat and so you could argue maybe we're being a little bit conservative in the category growth number for the back half of the year. I think we don't want to get ahead of ourselves on category growth given the external environment, which remains very dynamic. But I will be disappointed if we grow -- when we report Q3, if we're guiding to a negative number for Q4, I don't think that's likely to happen.

Okay. And just from that filling in the blanks here, too, curious about visibility, retail orders and holiday plans? And maybe any thoughts on retail inventory levels heading into holiday season?

Yes. Retail inventory levels are in pretty good shape. We haven't seen any sort of overstock or things that we need to work down. If anything, a number of our innovations, we're sort of chasing supply because we can't supply demand fast enough. And so we have a couple of our big innovations on -- actually on allocation right now. And so that's been more of the thing that we're worried about internally. Not big enough to move the whole needle from a company perspective. but we don't see any let or any big outage on retail inventory levels at the moment.

Okay. Let's talk a little bit about margins. near term -- so gross margins this year are going to have a nice benefit from tariff refunds, 140 basis points. So I know it's still early, but we've definitely already been getting questions about 2027 gross margins and building blocks knowing you're just mechanically going to have this difficult lap. So good forward looking, but it would be great to cover off on gross margins for '27.

I guess what I'd say is we feel really good about our ability to drive gross margin expansion in a normalized environment. If you go back 3 years ago, when we first initiated our new strategy with our very choice for where to play and how to win choices, we've been able to drive gross margin up roughly 500 basis points over that 3-year horizon. That was despite the fact that we had a big tariff headwind in '25. That was roughly $0.23 a share. That's despite the fact that in '26, we've had about $200 million of inflationary impacts, largely tracing back to macroeconomic factors coming out of the geopolitical situation in the Middle East. And we were able to do that despite having over that time frame, generally speaking, negative sales leverage, okay? So now as we think about projecting out to '27, what do we know? We know that our fuel productivity program, which we believe is world-class, will continue to operate at pace. So we feel very good about that. We believe that the tariff environment has probably hit peak tariff, at least as it relates to our product sets based on what we currently know about the tariff regime in the current fiscal year. So we went from about $115 million of impacts in '25, about $127 million this year excluding all the tariff refund noise, that we believe that will likely roll over into '27. So year-over-year, there should be actually some tariff favorability as it relates to that, broadly speaking. We also believe that the inflationary shocks that we've incurred this year, we believe, are temporal in nature. And that when things sort out in the Middle East, that will roll down, and it won't be at the same rate that we've had to offset in the current environment. We also know that the innovation that we've been launching has been doing very well, and we know that the innovation in order to get through our screening process has to be gross margin accretive. So this year, we have 25 Tier 1, Tier 2s that are gross margin accretive. We also know that the prior year launches in '24 and '25 where the innovation is doing well. They will be leveraged into years 2 and 3 and 4, right? And so we know that in '27 there'll be even more gross margin accretive innovation coming. So when you put all those things together, plus -- and I think this is maybe the 1 that some people missed, the benefit we'll start getting out of our domestic production facilities that we spent $2 billion to automate since 2017, have really good favorable marginal economics. And we've been able to get that 500 basis points of gross margin despite all those headwinds. And now we're going to be looking at a situation where we're going to get unit volume leverage through that highly automated set. So we feel very, very good about '27. We don't guide on gross margin, as you know. But when we look at that in totality, we feel really pretty good about where the company is currently sitting.

Okay. So a lot of positives, but I'm guessing you don't want people walking away from this conversation, though, modeling gross margins up inclusive of the 140 basis points this year.

Right. What we've done is -- we've been very clear that in the current year, there's about $0.17 of favorability related to out-of-period tariff recoveries for monies that we had to pay and incurred in 2025. So when you look at our current year guidance range of $0.73 to $0.77, there is that $0.17 that's in there for that specific reason.

And that number that Mark is talking about of about $100 million did manifest in gross margin. So if you take that out of period adjustment out of this year's gross margin, and use that as the starting place and then say, we're going to go forward for all the factors Mark talked about, I think that's probably the right way to think about it.

Okay. Great. Let's talk a little bit more about productivity. So fuel, like it's been really successful in the last couple of years. I think the run rate is around 200 basis points a year, is that right?

It's about $200 million this year that it's generating. On a basis point standpoint, we've been taking out roughly 4.5% of COGS. Each year over the last couple of years.

Okay. I apologize for.

We believe world class is SP697604866 So that team has been hitting it out of the park.

Okay. So how much of this has been at this point sort of capturing low-hanging fruit versus now you get to like the harder work and as we think going forward, what is the right run rate for productivity going forward? And what keeps driving that incremental.

We're increasingly excited about the fuel productivity program, what that team has been able to accomplish. So -- when we finished last year, we had 39 plants that had initiated the Peak program. As we sit here today, that number is 47 we've talked about the fact that there's really 6 stages to the program. And this is kind of our Lean Sigma cost takeout program. You start in foundations, you go to base camp and there's climb 1, 2 and 3 and then you hit the summit. So there's 6 stages to the overall program. As we sit here today with 47 sites that are enrolled in the program, which is 90% of the total targeted sites, we only have 25 -- we have 25 of those 40 at are basically at either foundations or base camp. Okay? So think about that. So 25 of the 47 are literally in the first or second stage of a 6-stage program. We have no sites, none that are at Cline 3 or the summit, zero. Okay? So this program just continues to build itself out. And the tools and the capability sets that the team is learning compounds on itself. And so presently, we track thousands of individual projects, literally thousands of individual projects, which contribute to us being able to take out roughly $15 million this year of hard savings, like we don't play games, like it's real math, it's real savings. And that's been equating to 4%, 4.5% of COGS take out each and every year. So we think there's still tremendous runway available. And I have to tell you, the AI enablement tools that we're bringing to bear, they unlock a lot of supply chain value as well. And so once we start putting that on top, Chris and I believe that we can continue to post world-class cost takeout for years, for years going forward.

I won't ask a question on future margins. Don't worry. Okay. So 1 shorter-term question I did want to ask though was we've heard at least once today about higher freight costs and maybe companies expected 6 or 8 weeks ago. So just curious what you're seeing there that's impacting you or not? I know over the long term, you've got it covered, but just shorter.

Yes, there's no question that the cost of diesel is having an impact on the business. I think we're at $92, $93 a barrel as we sit here today on the WTI. Obviously, diesel over the last couple of days kind of hit an all-time high in excess of $5 a gallon. So that does impact us. When we started this year, we thought we'd have about $100 million of inflationary impacts. At the end of the first quarter, you heard us up that by an additional $50 million at the end of the second quarter, we added another $50 million on top of that. Most of that is coming to us in 2 sources. It's either resin, which is obviously dependent on the price of oil or it is direct transportation costs, i.e., i.e., diesel. Now I think the team has done a remarkably good job of being able to offset those challenges. -- which is what has basically allowed us to manage the year, I think, very efficiently and effectively. And that's why you saw us in the last quarterly release, we were basically able to add that $0.17 about the low and high end of our range, which was the out-of-period refund monies that A lot of companies had to use those out of period refund monies to offset intra-year challenges. We were able to push that through on both the bottom and the top end because we made additional choices on the fuel to productivity program on the overhead spend -- we obviously are benefiting now from being able to take our revenue forecast up. And we did that in the last quarterly release, and so that then manifests itself through the factory systems and gives us unit volume leverage. And so we feel pretty good about our ability to be agile and then handle those. But certainly, it will be some impact. And we have to see how long it now rates at this higher price, I mean it could roll back over tomorrow for all we know.

Sure. Okay. Great. I want to spend a moment on capital allocation. So you're set to the end of the year below 4.5x on leverage, which is great. So you've spoken to a longer-term target of 2.5x why is 2.5x the right level?

A couple of reasons. So first, when we started our journey, I think we were around 6.5x levered. And we did say in our last quarterly call that we will be comfortably below 4.5x when the dust settles on this current fiscal year. So we feel really good. Again, we've been able to take 2 turns off despite the tariff challenges, despite the inflationary challenges. So we feel good about that. We believe it's important to be an investment-grade issuer because, obviously, it lowers our cost of capital. If you did the math right now and you basically imputed through and you said, if you are already at an investment-grade status, what would that do to your average cost of debt, ours would come down roughly 135, 140 basis points, if you actually did that math. That's over $70 million a year of interest expense. That's a lot of money, right? And so obviously, we want to be able to be able to have a lower cost of capital. We want to have a balance sheet that allows us to be opportunistic as it relates to maybe small strategic tuck-ins when the time comes. And it just gives everyone a little more confidence when the balance sheet is in better regard.

Yes. Okay. And Chris, on your first day as CEO, you cut the dividend. We definitely hear from some investors who'd like to see you guys do that again in order to pay down debt faster. So what would be your response to that?

Yes. I think, first of all, it's never fun or easy to cut the dividend. I've only done it once in my life, and it was on the first day I became CEO. So I didn't shy away from it, and it needed to happen at that point in time. I feel very differently today. I do -- we do get some questions from investors equally, we get a number of investors who come and say, don't touch the dividend. So depending on who you talk to, you get very different messaging. What we look at is the operating cash flow that we're expecting to generate this year, which is -- we've guided to about $400 million. We've said the CapEx is going to be about $200 million. So if you look at our free cash flow, our free cash flow is sufficient to not only pay the dividend but also to pay debt down and end the year with less debt. So we're expecting to pay down north of $100 million of debt this year. And I expect that number will go higher next year. And so we think that we can drive this delevering on the balance sheet, both through debt paydown and EBITDA growth. And we think we're generating sufficient cash, free cash flow in the business to do both, fund the dividend and fund B. So we're very comfortable where we are. And we think that there are enough investors that value the dividend that we don't think that's the right move to touch the dividend right now.

So Mark, you mentioned tuck-in M&A when the time is right. You guys have done such a great job focusing the company on priority brands, geographies -- you sold license and shut down a good number of brands. And you've got visibility to leverage getting to 3x or lower. So how do you think about the opportunity to acquire new brands? Like are there certain areas that you would look broaden is leverage the only hurdle to making a decision that it's okay to go now, but I'd like to get in a little bit more of the thought process of going the other way. to add.

Yes. I guess what I would say, and then, Chris, I'm sure we'll add some additional color is, look, we're not at that point yet, right? We have a long way to go still, and we are committed to getting ourselves back to investment-grade status. Now along that journey, and over the course of the last many years, we have been building a flywheel that is highly integrated and is scaled on the supply chain side of the house and across all the corporate capability sets as well. at some point in time, I think we would be a very good acquirer of businesses because we can bolt those in and drive a very high level of synergy effects throughout that process. But they would have to be things that are very much in line with our core capabilities, our core businesses, that go through the same distribution channels. And so like I said, we're not there yet. Chris may have some additional color to add, but it would have to be something that is on the merits, clearly very logical titin clean.

Yes. The only thing I would add is we see tremendous opportunity in our existing brand portfolio. So we don't think we need to do any acquisition to drive significant value creation from top line growth, margin expansion and deleveraging. And so we've got a very strong base plan and as a result, I think our bar for doing something from an acquisition standpoint is pretty high. It would have to be a very strong strategic fit. It would have to be accretive, it would have to accelerate our deleveraging impact as opposed to take us backwards. And I'm not a believer in large-scale acquisitions for this company. So just to be clear.

Okay. Great. One thing we were talking -- sneaking in 2 questions at time. A year ago is a little bit different direction. But a year ago, we were talking a lot about tariff advantage categories, right? The world was shifting, right? When we were sitting here last year, and there was a lot of anticipation of how that would all shake out. Where do you think you are right now on sort of capturing that opportunity of having such a big percentage of the portfolio manufactured domestically?

Yes. It's certainly been a big advantage. So we have 15 U.S. manufacturing plants. In many cases, we are tariff advantaged in that manufacturing footprint. And as Mark said, we've automated those manufacturing plants, so they are highly cost competitive and in many cases, have the best cost in the category. If you look at the distribution gains that we've had this year in the U.S. of, call it, mid-single digits, that's a function of a whole number of things. Part of it is innovation, part of it's better brand building, part of it's better retail execution. But part of it is the tariff advantage selling too. And we've seen that in the Writing category where we've got the world's largest writing factory in Tennessee. We've seen that on things like I mentioned, Rubbermaid coming out of Ohio. We've seen that on a number of our businesses that are made in the U.S.A. that retailers are increasingly looking to lean into to avoid the tariff dynamic and the uncertainty of sort of that tariff environment. So we think it's a big deal. We've moved our -- last thing I would say on this is we've moved our manufacturing index, we used to manufacture about 45% of our business in the U.S., and we're now up to about 55%. So we've meaningfully improved the amount of our business that's manufactured in the country by in-sourcing things into our U.S. manufacturing footprint. And part of what's enabled that is this automation effort that we've driven across the manufacturing base.

Okay. So my final question is just assuming we're here together again. So considers an invitation. We're sitting here again a year from now. What are the maybe 3 operating or financial measures that you would want investors to be looking at to say something's changed. They're on the right path. The turnaround has continued.

Yes. It's very simple. The 3 things that we're focused on that we talk every day are core sales growth first. And we had 1 quarter of core sales growth in Q2 at 2.3%. We're on our way to a second quarter this quarter, and we need to sustain that. And I think as we sustain that, and demonstrate that through the capability set that I went through, that has a potential for the company to completely rerate in terms of how investors look at this company. Second thing is operating margin. We think we've got significant opportunity on the gross margin line and on the overhead line. And we think we have funded the necessary A&P increase at this point. So we think operating margin would be the second. And then third for us is the cash flow and delevering. And we believe we're on track to continue the delevering path. We're excited that we've gone from 6.5x to below 4.5%, but we'd like to continue the journey to get to 2.5. And we think -- those 3 things are the things that we talk about. Those are the 3 things we think investors care about.

Okay. Great. All right. We're going to move to breakout, but thank you so much for being with me this year. Please join me in thanking Noel, for coming.

Thank you.